PART I
Overview
Cicero,
Inc. (the “Company”) provides desktop activity
intelligence, process intelligence and automation software to help
organizations isolate issues and automate employee tasks in the
contact center and back office. The Company provides an innovative
and unique combination of application and process integration,
automation, and desktop analytics capabilities, all without
changing the underlying applications or requiring costly
application development. The Company’s software collects
desktop activity and application performance data and tracks
business objects across time and multiple users, as well as
measures against defined expected business process flows, for
either analysis or to feed a third-party application. In addition
to software solutions, the Company also provides technical support,
training and consulting services as part of its commitment to
providing customers with industry-leading solutions. The
Company’s consulting team has in-depth experience in
developing successful enterprise-class solutions as well as
valuable insight into the business information needs of customers
in the largest Fortune 500 corporations worldwide.
The
Company focuses on the activity intelligence, process intelligence
and customer experience management market with emphasis on desktop
analytics and automation with its Intelligent Analytics Platform
(IAP). Activity intelligence captures what employees are doing,
what resources they are using and how long an activity may take.
Process intelligence captures the workflows that are being utilized
and identifies any bottlenecks that exist within those
workflows.
Cicero
collects desktop activity leveraging a suite of sensors. Cicero IAP
is a lightweight and configurable tool to collect activity and
application performance data and track business objects across time
and across multiple users as well as measure against a defined
"expected" business process flow, either for analysis or to feed a
third-party application.
Cicero’s IAP
is a measurement and analytics solution that collects and presents
high value information about quality, productivity, compliance, and
revenue from frontline activity to target areas for improvement.
Powered by Cicero’s Deep Sensor Technology including our
System Sensors, our Session Sensors, our Activity Sensors and our
Process Sensors, Cicero Insight collects activity data about the
applications and workflows being used and makes it readily
available for analysis and action to the business
community.
Cicero
Automation delivers all the features of the Cicero IAP product as
well as desktop automation for enterprise contact center and back
office employees. Leveraging existing IT investments Cicero
Automation integrates applications, automates workflow, and
provides control and adaptability at the end user
desktop.
Cicero
Automation also provide Single Sign-On (SSO) and stay signed on
capability. The software maintains a secure credential store that
facilitates single sign-on. Passwords can be reset but are
non-retrievable. Stored interactions can be selectively encrypted
based on the needs of the enterprise. All network communications
are compressed and encrypted for transmission.
The
Company provides an intuitive configuration toolkit for each
product, which simplifies the process of deploying and managing the
solutions in the enterprise. The Company provides a unique way of
capturing untapped desktop activity data using sensors, combining
it with other data sources, and making it readily available for
analysis and action to the business community. The Company also
provides a unique approach that allows companies to organize
functionality of their existing applications to better align them
with tasks and operational processes. In addition, the
Company’s software solutions can streamline end-user tasks
and enable automatic information sharing among line-of-business
siloed applications and tools. It is ideal for deployment in
organizations that need to provide access to enterprise
applications on desktops to iteratively improve business
performance, the user experience, and customer satisfaction. By
leveraging desktop activity data, integrating disparate
applications, automating business processes and delivering a better
user experience, the Company’s products are ideal for the
financial services, insurance, healthcare, governmental and other
industries requiring a cost-effective, proven business performance
and user experience management solution for enterprise
desktops.
Some of
the companies that have implemented or are implementing the
Company’s software solutions include CitiCorp, Nationwide
Financial Services, First Tennessee Bank, Assurant, JP Morgan
Chase, Convergys, Delta Dental of New Jersey, C.H. Robinson and
UBS. We have also sold our products to healthcare, banking, and
government users.
Cicero
Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc.
and re-incorporated in Delaware in 1999. It was renamed to Cicero,
Inc. in 2007. Our principal executive offices are located at 8000
Regency Parkway, Suite 542, Cary, NC 27518 and our telephone number
is (919) 380-5000. Our web site is www.ciceroinc.com.
Products
The
Company’s software products deliver desktop activity
intelligence and process intelligence to improve business
performance. All of our products - Cicero Intelligent Analytics
Platform and Cicero Automation - leverage existing technologies by
securely collecting desktop activity data and automating redundant,
manual processes, improving business processes and the user
experience.
Cicero Intelligent Analytics Platform (IAP)
Cicero
IAP collects activity and application performance data and tracks
business objects across time and across multiple users, as well as
measures against a defined "expected" business process flow, either
for analysis or to feed a third-party application. Cicero IAP is
invisible to the end user – it gathers data about what they
do, what applications they run, how those applications are used,
the health of their computer and the type of data they are working
on that the company is interested in. These data are collected and
stored centrally and can be tracked in real-time or via deferred
processing.
Cicero
IAP is a measurement and analytics solution that collects and
presents high value information about quality, productivity,
compliance, and revenue from frontline activity to target areas for
improvement. Using a set of configurable sensors at the
employees’ desktop Cicero IAP collects activity data about
the applications, when and how they are used and makes it readily
available for analysis and action to the business community. Cicero
IAP:
●
Provides a source
of rich data from the desktop, which is not readily obtainable or
commonly utilized in business level analysis.
●
Is a solution to
analyze data and identify areas of improvement with actionable
intelligence (data-driven decisions).
●
Helps companies
establish a desktop knowledge baseline.
●
Delivers role-based
dashboards, reporting and analytics in a web and mobile
context.
●
Supports data
harmonization with the integration and correlation of data from
other data platforms.
●
Combines
proprietary Machine Learning with both process and relational data
mining to generate predictive analytics
Companies
are using Cicero IAP to:
●
See how the events
at the desktop impact business goals, the employee and customer
experience.
●
Measure and
assessing activity (what activity, by whom, where, how much and
when).
●
Identify compliance
issues (installed software and versions, approved/unapproved apps,
web usage and domain access, copying files, external drive access,
etc.).
●
Identify top
performers, best practices, etc.
●
Have current
hardware configuration and state of utilization data.
●
Establish a
knowledge baseline for the employee desktop.
●
Measure and assess
performance (hardware and user).
●
Measure and assess
process/task efficiency (look at the frequency of use of an
application vs. total time spent in an application).
●
Identify the next
best action for the agent
●
Identify
improvement opportunities through automation, training, process
changes, and fraud/regulatory and compliance changes.
Cicero Automation™
Cicero
Automation enables businesses to transform human interaction across
the enterprise. It enables the flow of data between different
applications, regardless of the type and source of the application,
eliminating redundant entry and costly mistakes. Cicero Automation
automates up and down-stream process flows, enforcing compliance
and optimizing handle and transaction time, reducing training time
and enabling delivery of best in class service. Cicero Automation
also captures real-time information about each process at the
desktop, allowing organizations to spot trends and forecast
problems before they occur.
Cicero
Automation software offers a proven, innovative departure from
traditional, costly and labor-intensive enterprise application
integration and automation solutions. The Company provides
non-invasive application integration, reducing enterprise
integration implementation cost and time. Cicero Automation also
enables customers to transform applications, business processes and
human expertise into a cost effective business solution that
improves operational efficiency.
By
using Cicero Automation technology, companies can decrease their
customer management costs, improve the customer experience,
maximize the lifetime value of existing customers, and more
efficiently cross-sell the full range of their products and
services resulting in an overall increase in return on their
information technology investments. In addition, the
Company’s software enables organizations to reduce the
business risks inherent in replacement or re-engineering of
mission-critical applications and extend the productive life and
functional reach of their application portfolio.
Services
We
provide a full spectrum of technical support, training and
consulting services across all of our products as part of our
commitment to providing our customers industry-leading business
integration solutions. Our services organization is staffed with
experts in the field of systems integration having backgrounds in
development, consulting, and business process reengineering. In
addition, our services professionals have substantial industry
specific backgrounds with extraordinary depth in our focus
marketplaces of financial services, contact centers, and the back
office.
Maintenance and Support
We
offer customers varying levels of technical support tailored to
their needs, including periodic software upgrades, and telephone
support. The Company’s products are frequently used in
mission-critical business situations, and our maintenance and
support services are accustomed to the critical demands that must
be met to deliver world-class service to our clients. Many of the
members of our staff have expertise in mission critical
environments and are ready to deliver service commensurate with
those unique client needs.
Training Services
Our
training organization offers a full curriculum of courses and labs
designed to help customers become proficient in the use of our
products and related technology as well as enabling customers to
take full advantage of our field-tested best practices and
methodologies. Our training organization seeks to enable client
organizations to gain the proficiency needed in our products for
full client self-sufficiency but retains the flexibility to tailor
their curriculum to meet specific needs of our
clients.
Consulting Services
We
offer consulting services around our product offerings in project
management, applications and platform integration, application
design and development and application renewal, along with
expertise in a wide variety of development environments and
programming languages. We also have an active partner program in
which we recruit leading IT consulting and system integration firms
to provide services for the design, implementation and deployment
of our solutions. Our consulting organization supports third-party
consultants by providing architectural and enabling
services.
Customers
Our
customers include both end-users to whom we sell our products and
services directly and distributors and other intermediaries who
either resell our products to end-users or incorporate our products
into their own product offerings. Typical end-users of our products
and services are large businesses with sophisticated technology
requirements for contact centers, in the financial services,
insurance and telecommunications industries, and intelligence,
security, law enforcement and other governmental
organizations.
Our
customers are using our solutions to rapidly deploy applications.
Some examples of customers' uses of our products
include:
●
A Regional Bank - A large U.S. regional
bank selected Cicero software to provide intelligent unified
desktop solutions for their customer service operations and
throughout their enterprise. Leveraging existing applications, the
new solution captures desktop activities, automates processes,
provides user guidance, and displays composite views of information
to improve user productivity and the customer
experience.
●
Business Process Outsourcers - use our
software solution in contact centers to provide real time
integration among existing back-office systems, eliminate redundant
data entry, shorten call times, provide real-time data access and
enhance customer service and service levels.
●
A financial institution - uses our
software solution to provide real-time integration among market
data, customer account information, existing back-office systems
and other legacy applications, eliminate redundant data entry,
provide real-time data access and processing, and enhance customer
service and service levels.
●
An insurance company –
Information technology and Cicero professionals created a Cicero
desktop solution which integrated computer telephony integration,
key business systems and numerous secondary applications in use in
the contact centers and elsewhere within the organization. Using
Cicero, the contact center agents now use a central, integrated
dashboard to navigate between applications, with key information
(like customer and policy numbers) passed automatically between
applications.
Verint,
UBS, Inc. and Delta Dental each accounted for more than ten percent
(10%) of our operating revenue in fiscal 2019. CH Robinson,
Nationwide, UBS, Inc. and Verint each accounted for more than ten
percent (10%) of our operating revenue in fiscal 2018.
Sales and Marketing
Sales
An
important element of our sales strategy is to supplement our direct
sales force by expanding our relationships with third parties to
increase market awareness and acceptance of our business
integration software solutions. As part of these relationships, we
continue to jointly sell and implement our software solutions with
strategic partners such as systems integrators and embed our
software along with other products through reseller
relationships. We provide training and other support
necessary to systems integrators and resellers to aid in the
promotion of our products. To date we have entered into
technology partnerships for integrated business solutions with
Teleopti, Avaya/KnoahSoft, NICE and Heartcore. In addition, we have
entered into strategic partnerships with Verint and Convergys.
These organizations have relationships with existing customers or
have access to organizations requiring top secret or classified
access. In addition, several of these partners can bundle our
software with other software to provide a comprehensive solution to
customers. We are not materially dependent on any of these
organizations. Generally, our agreements with such partners provide
for price discounts based on their sales volume, with no minimum
required volume. The Company adopted ASU 2014-09 Revenue from
Contacts with Customers (Topic 606) as of January 1, 2018. Based on
the evaluation the Company performed on its customer contracts, the
adoption did not have a material impact on the Company’s
financial position, results of operations, cash flow, accounting
policies, business processes, internal controls or
disclosures.
Marketing
The
target markets for our products and services are in the financial
services, insurance, and healthcare industries, as well as users in
the intelligence and security communities and other governmental
organizations. Increasing competitiveness and consolidation is
driving companies in such businesses to increase efficiency,
improve the user experience and improve the quality of their
customer contact centers. As a result, companies are compelled by
both economic necessity and internal mandates to find ways to
increase internal efficiency, increase customer satisfaction,
increase effective cross-selling, decrease staff turnover cost and
leverage their investment in current information
technology.
Our
marketing team has an in-depth understanding of business
performance and user experience software marketplaces and the needs
of these customers, as well as experience in all of the key
marketing disciplines. They also have knowledge across industries
in financial services, insurance, healthcare, and government
organizations that have focused on application integration and
business process automation solutions to address needs in mergers
and acquisitions and homeland security.
Core
marketing functions include product marketing, digital marketing
and public relations. We utilize focused marketing programs that
are intended to attract potential customers in our target vertical
industries and to promote our Company and our brands. Our marketing
programs are specifically directed at our target markets, and
include speaking engagements, public relations campaigns, focused
trade shows and web site marketing, while devoting substantial
resources to supporting the field sales team with high quality
sales tools and ancillary material. As product acceptance grows and
our target markets increase, we will shift to broader marketing
programs.
The
marketing department also produces ancillary material for
presentation or distribution to prospects, including
demonstrations, presentation materials, white papers, case studies,
articles, brochures, and data sheets.
Research and Product Development
We
incurred research and development expense of approximately
$1,147,000 and $991,000 in 2019 and 2018,
respectively.
Cicero
Intelligent Analytics Platform and Cicero Automation are products
that exist in a rapidly changing technology environment and as
such, it is imperative to constantly enhance the features and
functionality of these products. Our budget for research and
development is based on planned product introductions and
enhancements. Actual expenditures, however, may significantly
differ from budgeted expenditures. Inherent in the product
development process are a number of risks. The development of new,
technologically advanced software products is a complex and
uncertain process requiring high levels of innovation, as well as
the accurate anticipation of technological and market
trends.
Competition
The
markets in which we compete are highly competitive and subject to
rapid change. These markets are highly fragmented and served by
numerous firms. We believe that the competitive factors affecting
the markets for our products and services include:
●
Product
functionality and features;
●
Availability and
quality of support services;
●
Ease of product
implementation;
●
Product reputation;
and
●
Our financial
stability.
The
relative importance of each of these factors depends upon the
specific customer environment. Although we believe that our
products and services can compete favorably, we may not be able to
increase our competitive position against current and potential
competitors. In addition, many companies choose to deploy their own
information technology personnel or utilize system developers to
write new code or rewrite existing applications in an effort to
deploy solutions to desktops. As a result, prospective customers
may decide against purchasing and implementing externally developed
and produced solutions such as ours.
We
compete with companies that utilize varying approaches to Robotic
Process Automation and Activity and Process Analytics:
●
Robotic Process
Automation software replicates and then automates highly repetitive
and rules based activities otherwise manually completed by a person
resource. This automation may be completed at the event level or
end-to-end. Competitors include UIPath, Blue Prism, Automation
Anywhere and Pegasystems.
●
Activity and
Process Analytics software listens for human activities in real
time and then stores this activity for analysis. Applying Machine
Learning to this data enables more sophisticated analysis and
greater scale, which results in use cases including process mapping
and improvement, fraud detection and social dynamics. Competitors
include Celonis, ABBYY, PAFNow.
Our
product continues to compete with the customer support focused
platforms including NICE and Verint, but to a lesser extent due to
our specialization in the Smart Analytics space. Consolidation
across the industry continues as RPA startups mature and look
toward acquisitions for continued growth. We expect additional
competition from other established and emerging companies.
Furthermore, our competitors may combine with each other, or other
companies may enter our markets by acquiring or entering into
strategic relationships with our competitors. Many of our current
competitors have greater name recognition, a larger installed
customer base and greater financial, technical, marketing and other
resources than we have.
Intellectual Property
Our
success is dependent upon developing, protecting and maintaining
our intellectual property assets. We rely upon combinations of
copyright, trademark and trade secrecy protections, along with
contractual provisions, to protect our intellectual property rights
in software, documentation, data models, methodologies, data
processing systems and related written materials in the
international marketplace. Copyright protection is generally
available under United States laws and international treaties for
our software and printed materials. The effectiveness of these
various types of protection can be limited, however, by variations
in laws and enforcement procedures from country to country. We use
the registered trademarks “Cicero®”, “United
Data Model®”, and “United
Desktop®”.
All
other product and company names mentioned herein are for
identification purposes only and are the property of, and may be
trademarks of, their respective owners.
Employees
As of
December 31, 2019, we employed 14 full-time employees. Our
employees are not represented by a union or a collective bargaining
agreement.
Available Information
Our web
address is www.ciceroinc.com. We make available free of charge
through our web site our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the
Securities and Exchange Commission. Also, the public may read and
copy such material at the Securities and Exchange
Commission’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the Securities
and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains an internet site that contains
reports, proxy and information statements, and other information at
www.sec.gov.
Forward Looking and Cautionary Statements
Certain
statements contained in this Annual Report may constitute "forward
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("Reform Act"). We may also make
forward looking statements in other reports filed with the
Securities and Exchange Commission, in materials delivered to
shareholders, in press releases and in other public statements. In
addition, our representatives may from time to time make oral
forward looking statements. Forward looking statements provide
current expectations of future events based on certain assumptions
and include any statement that does not directly relate to any
historical or current fact. Words such as "anticipates,"
"believes," "expects," "estimates," "intends," "plans," "projects,"
and similar expressions, may identify such forward looking
statements. In accordance with the Reform Act, set forth below are
cautionary statements that accompany those forward looking
statements. Readers should carefully review these cautionary
statements as they identify certain important factors that could
cause actual results to differ materially from those in the forward
looking statements and from historical trends. The following
cautionary statements are not exclusive and are in addition to
other factors discussed elsewhere in our filings with the
Securities and Exchange Commission and in materials incorporated
therein by reference: our future success depends on the market
acceptance of our products and successful execution of the
strategic direction; general economic or business conditions may be
less favorable than expected, resulting in, among other things,
lower than expected revenues; an unexpected revenue shortfall may
adversely affect our business because our expenses are largely
fixed; our quarterly operating results may vary significantly
because we are not able to accurately predict the amount and timing
of individual sales and this may adversely impact our stock price;
trends in sales of our products and general economic conditions may
affect investors' expectations regarding our financial performance
and may adversely affect our stock price; we may lose market share
and be required to reduce prices as a result of competition from
our existing competitors, other vendors and information systems
departments of customers; we may not have the ability to recruit,
train and retain qualified personnel; rapid technological change
could render the Company's products obsolete; loss of any one of
our major customers could adversely affect our business; our
products may contain undetected software errors, which could
adversely affect our business; because our technology is complex,
we may be exposed to liability claims; we may be unable to enforce
or defend our ownership and use of proprietary technology; because
we are a technology company, our common stock may be subject to
erratic price fluctuations; and we may not have sufficient
liquidity and capital resources to meet changing business
conditions.
We have a history of losses and there are no assurances that such
losses may not continue.
We
experienced operating losses and net losses for each of the years
from 2005 through 2019. We incurred a net loss of $1.6 million and
$2.1 million for fiscal 2019 and 2018, respectively. As of
December 31, 2019, we had a working capital deficit of $4.4
million. Our ability to generate positive cash flow is dependent
upon sustaining certain cost reductions and generating sufficient
revenues. If we are unable to generate positive cash flow, our
results of operations and financial condition may be adversely
affected.
Our independent registered public accounting firm has expressed
substantial doubt about our ability to continue as a going
concern.
The
report of our independent auditors dated March 27, 2020 on our
consolidated financial statements for the period ended December 31,
2019 included an emphasis of matter paragraph indicating that there
is substantial doubt about our ability to continue as a going
concern. Our auditors’ doubts are based on our recurring
losses from operations and working capital deficit. Our ability to
continue as a going concern will be determined by our ability to
secure customer contracts that will drive sufficient cash flow to
sustain our operations and/or raise additional capital in the form
of debt or equity financing. Our consolidated financial statements
do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should we be
unable to continue as a going concern.
Our inability to obtain sufficient capital either through
internally generated cash or through the use of equity or debt
offerings could impair the growth of our
business.
Historically, we
have relied on equity and debt offerings, borrowings and operating
cash flows to finance our working capital requirements. Reliance on
internally generated cash to finance our operations could
substantially limit our operational and financial flexibility. We
have experienced negative cash flows from operations for a number
of years, including the past three years. To the extent that we
have insufficient operating cash flows, our ability to finance our
operations may be limited by the extent to which we are able to
raise capital through debt or equity financings. The extent to
which we will be able to use shares of capital stock will depend on
the market value of our capital stock from time to time and the
willingness of potential investors to invest in our company. Using
shares of capital stock for this purpose also may result in
significant dilution to our than existing stockholders. Raising
external capital in the form of debt could require periodic
interest payments that could hinder our financial flexibility in
the future. Besides, our ability to obtain external financing is
subject to a number of uncertainties, including:
●
our future financial condition, results of operations and cash
flows;
●
the state of global credit markets; and
●
general market conditions for financing activities by companies in
our industry.
Our
failure to obtain a sufficient amount of capital on acceptable
terms to finance our operations may materially and adversely affect
the growth of our business.
We depend on an acceptance of our products for ongoing
revenue.
The
Company’s future revenues are entirely dependent on
acceptance of Cicero’s products. The Company has experienced
negative cash flows from operations for a number of years,
including the past three years. At December 31, 2019, the Company
had a working capital deficiency of $4.4 million. In order to
generate sufficient revenues to sustain its operations, the Company
will need to attract more accounts in the near future.
Economic conditions could adversely affect our revenue growth and
cause us not to achieve desired revenue.
Our
ability to generate revenue depends on the overall demand for
customer experience management software and services. Our business
depends on overall economic conditions, the economic and business
conditions in our target markets and the spending environment for
information technology projects, and specifically for customer
experience management in those markets. A weakening of the economy
in one or more of our geographic regions, unanticipated major
events and economic uncertainties may make the spending environment
more challenging for our software and services, reduce capital
spending on information technology projects by our customers and
prospective customers, result in longer sales cycles for our
software and services and/or cause customers or prospective
customers to be more cautious in undertaking larger transactions.
Those situations may cause a decrease in our revenue. A decrease in
demand for our software and services caused, in part, by a
weakening of the economy, may result in a decrease in our revenue
rates.
Because we cannot accurately predict the amount and timing of
individual sales, our quarterly operating results may vary
significantly, which could adversely impact our stock
price.
Our
quarterly operating results have varied significantly in the past,
and we expect they will continue to do so in the future. We have
derived, and expect to continue to derive in the near term, a
significant portion of our revenue from relatively large customer
contracts or arrangements. The timing of revenue recognition from
those contracts and arrangements has caused and may continue to
cause fluctuations in our operating results, particularly on a
quarterly basis. Our quarterly revenues and operating results
typically depend upon the volume and timing of customer contracts
received during a given quarter and the percentage of each
contract, which we are able to recognize as revenue during the
quarter. Each of these factors is difficult to forecast. As is
common in the software industry, the largest portion of software
license revenues are typically recognized in the last month of each
fiscal quarter and the third and fourth quarters of each fiscal
year. We believe these patterns are partly attributable to
budgeting and purchasing cycles of our customers and our sales
commission policies, which compensate sales personnel for meeting
or exceeding periodic quotas.
Furthermore,
licensing fees for Cicero Automation are significant and each sale
can or will account for a large percentage of our revenue and a
single sale may have a significant impact on the results of a
quarter. In addition, the substantial commitment of executive time
and financial resources that have historically been required in
connection with a customer’s decision to purchase our
software increases the risk of quarter-to-quarter fluctuations. Our
software sales require a significant commitment of time and
financial resources because it is an enterprise product. Typically,
the purchase of our products involves a significant technical
evaluation by the customer and the delays frequently associated
with customers’ internal procedures to approve large capital
expenditures and to test, implement and accept new technologies
that affect key operations. This evaluation process frequently
results in a lengthy sales process of several months. It also
subjects the sales cycle for our products to a number of
significant risks, including our customers’ budgetary
constraints and internal acceptance reviews. The length of our
sales cycle may vary substantially from customer to
customer.
Our
product revenue may fluctuate from quarter to quarter due to the
completion or commencement of significant assignments, the number
of working days in a quarter and the utilization rate of services
personnel. As a result of these factors, we believe that a
period-to-period comparison of our historical results of operations
is not necessarily meaningful and should not be relied upon as
indications of future performance. In particular, our revenues in
the third and fourth quarters of our fiscal years may not be
indicative of the revenues for the first and second quarters.
Moreover, if our quarterly results do not meet the expectations of
our securities analysts and investors, the trading price of our
common stock would likely decline.
Loss of key personnel associated with Cicero development could
adversely affect our business.
Loss of
key executive personnel or the software engineers we have hired
with specialized knowledge of our technology could have a
significant impact on our execution of our new strategy given that
they have specialized knowledge developed over a long period of
time with respect to our technology.
Different competitive approaches
or internally developed solutions to the same business problem
could delay or prevent adoption of Cicero Intelligent Analytics
Platform and Cicero
Automation.
Cicero
products are designed to provide a unique way for an enterprise to
understand what is truly happening on their users’ desktops.
To effectively penetrate the market for solutions to this problem,
Cicero products will compete with traditional quality assurance and
desktop analytic solutions that attempt to solve this business
problem. Quality assurance and desktop analytics solutions are
currently sold and marketed by companies such as PegaSystems and
Verint. There can be no assurance that our potential customers will
determine that Cicero methodology is superior to solutions provided
by the competitors described above in addressing this business
problem. Moreover, the information systems departments of our
target customers, large financial institutions, are large and may
elect to attempt to internally develop an internal solution to this
business problem rather than to purchase a Cicero
product.
Cicero
Automation is designed to address in a novel way the problems that
large companies face integrating the functionality of different
software applications by integrating these applications at the
desktop. The market is currently referred to as Robotic Processing
Automation (RPA). Robotic Process Automation software replicates
and then automates highly repetitive and rules based activities
otherwise manually completed by a person resource. This automation
may be completed at the event level or end-to-end. Competitors
include UIPath, Blue Prism, Automation Anywhere and Pegasystems.
There can be no assurance that our potential customers will
determine that Cicero Automation’s desktop integration
methodology is superior to RPA solutions provided by the
competitors described above in addressing this business problem.
Moreover, the information systems departments of our target
customers, large financial institutions, are large and may elect to
attempt to internally develop an internal solution to this business
problem rather than to purchase the Cicero Automation
product.
Accordingly, we may
not be able to provide products and services that compare favorably
with the products and services of our competitors or the internally
developed solutions of our customers. These competitive pressures
could delay or prevent adoption of Cicero Intelligent Analytics
Platform or Cicero Automation or require us to reduce the price of
our products, either of which could have a material adverse effect
on our business, operating results and financial
condition.
Our ability to compete may be subject to factors outside our
control.
We
believe that our ability to compete depends in part on a number of
competitive factors outside our control, including the ability of
our competitors to hire, retain and motivate senior project
managers, the ownership of competitors of software used by
potential clients, the development by others of software that is
competitive with our products and services, the price at which
others offer comparable services and the extent of our
competitors’ responsiveness to customer needs.
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product
introductions and short product life cycles.
Our future
success will depend to a substantial degree upon our ability to
enhance our existing products and to develop and introduce, on a
timely and cost-effective basis, new products and features that
meet changing customer requirements and emerging and evolving
industry standards.
The
introduction of new or enhanced products also requires us to manage
the transition from older products in order to minimize disruption
in customer ordering patterns, as well as ensure that adequate
supplies of new products can be delivered to meet customer demand.
There can be no assurance that we will successfully develop,
introduce or manage the transition to new products.
We have
in the past, and may in the future, experience delays in the
introduction of our products, due to factors internal and external
to our business. Any future delays in the introduction or shipment
of new or enhanced products, the inability of such products to gain
market acceptance or problems associated with new product
transitions could adversely affect our results of operations,
particularly on a quarterly basis.
In
order to fully implement our business plan, we will be required to
stay current with common technology enhancements and the needs of
the modern contact center, back and branch office. To that end we
will be required to extend our support for browser-based
applications to support Microsoft Edge on Windows 10 and for
Windows-based application support to include UAP (formerly Metro).
Further, operational changes in the contact center industry, such
as chat and social-media agents, require that we extend support for
concurrent use of applications, enabling agents to work
simultaneously with more than one customer.
The reputation of our software may be damaged and we may face a
loss of revenue if our software products fail to perform as
intended or contain significant defects.
Our
software products are complex, and significant defects may be found
following introduction of new software or enhancements to existing
software or in product implementations in varied information
technology environments. Internal quality assurance testing and
customer testing may reveal product performance issues or desirable
feature enhancements that could lead us to reallocate product
development resources or postpone the release of new versions of
our software. The reallocation of resources or any postponement
could cause delays in the development and release of future
enhancements to our currently available software, require
significant additional professional services work to address
operational issues, damage the reputation of our software in the
marketplace and result in potential loss of revenue. Although we
attempt to resolve all errors that we believe would be considered
serious by our partners and customers, our software is not
error-free. Undetected errors or performance problems may be
discovered in the future, and known errors that we consider minor
may be considered serious by our partners and customers. This could
result in lost revenue, delays in customer deployment or legal
claims and would be detrimental to our reputation. If our software
experiences performance problems or ceases to demonstrate
technology leadership, we may have to increase our product
development costs and divert our product development resources to
address the problems.
We may be unable to enforce or defend our ownership and use of
proprietary and licensed technology.
Our
success depends to a significant degree upon our proprietary and
licensed technology. We rely on a combination of patent, trademark,
trade secret and copyright law, contractual restrictions and
passwords to protect our proprietary technology. However, these
measures provide only limited protection, and there is no guarantee
that our protection of our proprietary rights will be adequate.
Furthermore, the laws of some jurisdictions outside the United
States do not protect proprietary rights as fully as in the United
States. In addition, our competitors may independently develop
similar technology; duplicate our products or design around our
patents or our other intellectual property rights. We may not be
able to detect or police the unauthorized use of our products or
technology, and litigation may be required in the future to enforce
our intellectual property rights, to protect our trade secrets or
to determine the validity and scope of our proprietary rights. Any
litigation to enforce our intellectual property rights would be
expensive and time-consuming, would divert management resources and
may not be adequate to protect our business.
We do
not believe any of our products infringe the proprietary rights of
third parties. However, companies in the software industry have
experienced substantial litigation regarding intellectual property
and third parties could assert claims that we have infringed their
intellectual property rights. In addition, we may be required to
indemnify our distribution partners and end-users for similar
claims made against them. Any claims against us would divert
management resources, and could require us to spend significant
time and money in litigation, pay damages, develop new intellectual
property or acquire licenses to intellectual property that is the
subject of the infringement claims. These licenses, if required,
may not be available on acceptable terms. As a result, intellectual
property claims against us could have a material adverse effect on
our business, operating results and financial
condition.
As the
number of software products in the industry increases and the
functionality of these products further overlaps, we believe that
software developers and licensors may become increasingly subject
to infringement claims. Any such claims, with or without merit,
could be time consuming and expensive to defend and could adversely
affect our business, operating results and financial
condition.
Our business may be adversely impacted if we do not provide
professional services to implement our solutions.
Customers that
license our software typically engage our professional services
staff or third-party consultants to assist with product
implementation, training and other professional consulting
services. We believe that many of our software sales depend, in
part, on our ability to provide our customers with these services
and to attract and educate third-party consultants to provide
similar services. New professional services personnel and service
providers require training and education and take time and
significant resources to reach full productivity. Competition for
qualified personnel and service providers is intense within our
industry. Our business may be harmed if we are unable to provide
professional services to our customers to effectively implement our
solutions or if we are unable to establish and maintain
relationships with third-party implementation
providers.
Our business may be adversely impacted by cyber security
breach.
Third
parties may attempt to fraudulently induce employees or customers
to disclose sensitive information such as user names, passwords, or
other information in order to gain access to our data, which could
result in significant legal and financial exposure and a loss of
confidence in the security of our service that would harm our
future business prospects. Because the techniques used to obtain
unauthorized access, or to sabotage systems, change frequently and
generally are not recognized until launched against a target, we
may be unable to anticipate these techniques or to implement
adequate preventative measures. If an actual or perceived breach of
our security occurs, the market perception of the effectiveness of
our security measures could be harmed and we could lose sales and
customers.
Because our software could interfere with the operations of
customers, we may be subject to potential product liability and
warranty claims by these customers.
Our
software enables customers’ software applications to
integrate and is often used for mission critical functions or
applications. Errors, defects or other performance problems in our
software or failure to provide technical support could result in
financial or other damages to our customers. Customers could seek
damages for losses from us. In addition, the failure of our
software and solutions to perform to customers’ expectations
could give rise to warranty claims. The integration of our software
with our customer’s applications increase the risk that a
customer may bring a lawsuit against us. Even if our software is
not at fault, a product liability claim brought against us, even if
not successful, could be time consuming and costly to defend and
could harm our reputation.
The so-called “penny stock rule” could make it
cumbersome for brokers and dealers to trade in our common stock,
making the market for our common stock less liquid which could
cause the price of our stock to decline.
The
Company’s common stock is quoted on the Over-the-Counter
Bulletin Board. Trading of our common stock on the OTCBB may be
subject to certain provisions of the Securities Exchange Act of
1934, as amended, commonly referred to as the "penny stock" rule. A
penny stock is generally defined to be any equity security that has
a market price less than $5.00 per share, subject to certain
exceptions. Our stock is currently a penny stock and therefore is
subject to additional sales practice requirements on
broker-dealers. These may require a broker-dealer to:
●
make a special
suitability determination for purchasers of our
shares;
●
receive the
purchaser's written consent to the transaction prior to the
purchase; and
●
deliver to a
prospective purchaser of our stock, prior to the first transaction,
a risk disclosure document relating to the penny stock
market.
Consequently, penny
stock rules may restrict the ability of broker-dealers to trade
and/or maintain a market in our common stock. Also, prospective
investors may not want to get involved with the additional
administrative requirements, which may have a material adverse
effect on the trading of our shares.
We have not paid any dividends on our common stock and it is likely
that no dividends will be paid in the future.
We have
never declared or paid cash dividends on our common stock and we do
not anticipate paying any cash dividends on our common stock in the
foreseeable future.
Provisions of our charter and Bylaws could deter takeover
attempts.
Our
certificate of incorporation authorizes the issuance, without
stockholder approval, of preferred stock, with such designations,
rights and preferences as the Board of Directors may determine from
time to time. Such designations, rights and preferences established
by the Board may adversely affect our stockholders. In the event of
issuance, the preferred stock could be used, under certain
circumstances, as a means of discouraging, delaying or preventing a
change of control of the Company. Although we have no present
intention to issue any shares of preferred stock in addition to the
currently outstanding preferred stock, we may issue preferred stock
in the future.
Item 1B. Unresolved Staff
Comments
Not
applicable.
Our
corporate headquarters and administrative functions are based in
offices of approximately 3,080 square feet in our Cary, North
Carolina office pursuant to a lease which expired in 2018. The
Company is currently on a month to month lease at the same office
location and are in negotiations on a new long term lease. We
believe that our present facilities are suitable for continuing our
existing and planned operations.
Item 3. Legal Proceedings
Not
applicable.
Item 4. Mine Safety Disclosures
Not
applicable.
PART III
Item 10. Directors, Executive Officers and
Corporate Governance
The
following table sets forth certain information about our directors
and executive officers:
|
Name
|
Age
|
Position(s)
|
|
John L
Steffens
|
78
|
Director
and Chairman
|
|
John
Broderick
|
70
|
Director
and Chief Executive Officer/Chief Financial Officer
|
|
Benjamin
L. Rosenzweig
|
34
|
Director
|
|
Mark
Landis
|
78
|
Director
|
|
Don
Peppers
|
69
|
Director
|
|
Todd
Sherin
|
46
|
Chief
Revenue Officer
|
John L. Steffens
Director
since May, 2007.
Mr.
John L. Steffens is the Founder of Spring Mountain Capital, LP, an
alternative investment firm located in New York City. Prior
to founding Spring Mountain Capital in 2001, Mr. Steffens spent 38
years at Merrill Lynch & Co., Inc., where he held numerous
senior management positions, including President of Merrill Lynch
Consumer Market, Vice Chairman of Merrill Lynch & Co., Inc.,
and Chairman of its U.S. Private Client Group. Under his
leadership, the Private Client Group experienced tremendous growth,
increasing assets under management from $200 billion to $1.6
trillion. Mr. Steffens also served on the board of directors
of Merrill Lynch & Co., Inc. from April 1986 until July
2001.
Mr.
Steffens currently serves on the Board of Directors of Colony
Capital, Inc. He also serves on the advisory boards of
StarVest Partners and Wicks Communication & Media Partners,
L.P. In addition, he is currently National Chairman Emeritus
of the Alliance for Aging Research. Previously, Mr. Steffens
served as Chairman of the Securities Industry Association (now the
Securities Industry and Financial Markets Association, or SIFMA),
as a Trustee of the Committee for Economic Development, and as a
member of the Board of Overseers of the Geisel School of Medicine
at Dartmouth. In 2010, Mr. Steffens was the recipient of the Billie
Jean King Contribution Award from the Women’s Sports
Foundation.
In
2001, Mr. Steffens founded Vineyard 7 & 8, a boutique winery
producing premium, limited production wine. Vineyard 7 &
8 is operated by the Steffens family and is located on Spring
Mountain in Napa Valley, California.
Mr.
Steffens graduated from Dartmouth College in 1963 with a B.A. in
Economics. He also completed the Advanced Management Program of the
Harvard Business School in 1979. We believe Mr. Steffens
qualifications to serve on the Board of Directors include his
experience in leading complex enterprises and his experience as a
senior executive.
John P. Broderick
Director
since July 2005.
Mr.
Broderick is currently the Chief Executive Officer and Chief
Financial Officer of the Company and is also a director. Mr.
Broderick has served as the Chief Executive Officer of the Company
since June 2005, as the Chief Financial Officer of the Company
since April 2001, and as Corporate Secretary since August 2001.
Prior to joining our Company, Mr. Broderick was Executive Vice
President of Swell Inc., a sports media e-commerce company where he
oversaw the development of all commerce operations and served as
the organization's interim Chief Financial Officer. Previously, Mr.
Broderick served as Chief Financial Officer and Senior Vice
President of North American Operations for Programmer's Paradise, a
publicly held international software marketer. Mr. Broderick
received his B.S. degree in accounting from Villanova University.
We believe Mr. Broderick’s qualifications to serve on our
Board of Directors include his intimate knowledge of our operations
as a result of day to day leadership as our Chief Executive
Officer.
Benjamin L. Rosenzweig
Director
since February 2017.
Mr.
Rosenzweig was appointed to serve on our Board of Directors in
February 2017, pursuant to a director designation right granted to
Privet Fund LP in connection with its purchase of the
Company’s common stock and warrants in July 2015. Mr.
Rosenzweig is currently a partner at Privet Fund Management LLC, an
investment management firm. Prior to joining Privet Fund Management
LLC in September 2008, Mr. Rosenzweig served as an investment
banking analyst in the corporate finance group of Alvarez and
Marsal from June 2007 until May 2008, where he completed multiple
distressed mergers and acquisitions, restructurings, capital
formation transactions and similar financial advisory engagements
across several industries. Mr. Rosenzweig is currently a Director
of PFSweb, Inc. and Hardinge, Inc. Mr. Rosenzweig is also
currently a board member and director of Potbelly
Corporation. Mr. Rosenzweig formerly served as a Director of
RELM Wireless Corp and Director of Startek, Inc. Mr. Rosenzweig
graduated magna cum laude
from Emory University with a Bachelor of Business Administration
degree in Finance and a second major in Economics. We believe
Mr. Rosenzweig qualifications to serve on our Board of Directors
include his financial background and previous business
experience.
Mark Landis
Director
since July 2005.
Mr.
Landis has been a Director of the Company since July 2005.
Mr. Landis retired in 2003 from Siemens Building Technologies where
he had served as President of the North American Security
Division. Previously he was CEO of Security Technologies
Group from 1988 to 2001, when it was sold to Siemens Building
Technologies. In 2008 he became Chairman of Dataflow
Technologies, Inc., and continues in that role. From 1982 to
1988 he was CEO of CASI, a developer of access control security
systems. CASI is now part of General Electric.
Mr. Landis earned a B.A. from Cornell University, a Juris
Doctorate from the University of Pennsylvania and a Chartered
Property and Casualty Underwriter (CPCU) degree from the
American Institute for Property and Liability Underwriters. We
believe Mr. Landis' qualifications to serve on our Board of
Directors include his experience in leading enterprises and his
experience as a senior executive.
Don Peppers
Director
since June 2007.
Mr. Peppers has been a Director since June 20,
2007. Mr. Peppers formed Marketing 1:1, Inc. in January 1992
which became Peppers & Rogers Group, a customer-centered
management consulting firm with offices located in the United
States, Europe, the Middle East, Latin America and South
Africa. He has written or co-authored eleven books on
marketing, sales, and customer relationships issues. Peppers
& Rogers Group is now a unit of TTEC (formerly
“TeleTech”), a business process outsourcer based in
Denver, Colorado. In 2016 Mr. Peppers left TTEC and formed CX
Speakers, LLC, to deliver workshops, keynote addresses, and
high-level consulting services to business clients. From
October 1990 to January 1992, Mr. Peppers was the Chief Executive
Officer of Perkins/Butler Direct Marketing, a top-20 U.S.
direct-marketing agency. Prior to marketing and advertising,
he worked as an economist in the oil business and as the director
of accounting for a regional airline. Mr. Peppers holds a
Bachelor's Degree in astronautical engineering from the U.S. Air
Force Academy, and a Master's Degree in public affairs from
Princeton University's Woodrow Wilson School. We
believe Mr. Peppers’ qualifications to serve on our Board of
Directors include his years of experience providing strategic
advisory services to organizations.
Todd Sherin
Mr.
Sherin has been the Chief Revenue Officer of the Company since July
2017 where he oversees Sales and Marketing, in addition to
Operations, including Product Strategy and Development. Prior to
his role at Cicero, Inc., from 2013 to 2017, Mr. Sherin founded
Wysk, LLC a Contact Center focused Systems Integrator. Under his
leadership, the boutique SI/VAR became a premier Workforce
Optimization specialist firm and was successfully sold to a Pan
American Value-Added Reseller. Previously, Mr. Sherin held multiple
technical and sales roles at Anexinet, Capgemini, Pfizer and IHS
Markit. Mr. Sherin received his B.A. degree in International
Relations from University of Pennsylvania.
There are no family relationships between or among the above
directors or executive officers.
Audit Committee
The
Audit Committee is composed of Mark Landis. The responsibilities of
the Audit Committee include the appointment of, retention,
replacement, compensation and overseeing the work of the
Company’s independent accountants and tax professionals. The
Audit Committee reviews with the independent accountants the
results of the audit engagement, approves professional services
provided by the accountants including the scope of non-audit
services, if any, and reviews the adequacy of our internal
accounting controls. The Audit Committee met formally four times
during our fiscal year ended December 31, 2019. Mr. Landis attended
every meeting while appointed to the Audit Committee. The Board of
Directors has determined that the members of the Audit Committee
are independent as defined in Rule 5605(a)(2) of The NASDAQ Stock
Market’s listing standards. Mr. Landis is an “audit
committee financial expert” due to his experience as a senior
executive.
Code of Ethics and Conduct
Our
Board of Directors has adopted a code of ethics and a code of
conduct that applies to all of our Directors, Chief Executive
Officer, Chief Financial Officer, and employees. We will provide
copies of our code of conduct and code of ethics without charge
upon request. To obtain a copy of the code of ethics or code of
conduct, please send your written request to Cicero Inc., Suite
542, 8000 Regency Pkwy, Cary, North Carolina 27518, Attn: Corporate Secretary. The code of ethics is
also available on the Company’s website at
www.ciceroinc.com.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company’s officers, directors and persons who own more
than ten percent of the Company’s Common Stock (collectively,
“Reporting Persons”) to file reports of ownership and
changes in ownership with the SEC. Reporting Persons are required
by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file. Based solely on its review of the
copies of such reports received by it and written representations
all Section 16(a) reports were filed in a timely manner during the
fiscal year ended December 31, 2019.
Item 11. Executive
Compensation.
Compensation Committee Membership and Organization
The
Company no longer has a standing Compensation Committee. The Board
of Directors now performs many of the functions of a compensation
committee including establishing, implementing and monitoring
adherence with the Company’s compensation philosophy such
as:
●
Setting the total
compensation of our Chief Executive Officer and evaluating his
performance based on corporate goals and objectives;
●
Reviewing and
approving the Chief Executive Officer’s decisions relevant to
the total compensation of the Company’s other executive
officer;
●
Making grants with
respect to equity-based plans in order to allow us to attract and
retain qualified personnel; and
●
Reviewing director
compensation levels and practices, and considering, from time to
time, changes in such compensation levels and practices of the
Board of Directors.
General Compensation Philosophy
As a
technology company, we operate in an extremely competitive and
rapidly changing industry. We believe that the skill, talent,
judgment and dedication of our executive officers are critical
factors affecting the long term value of our Company. Our
philosophy and objectives in setting compensation policies for
executive officers are to align pay with performance, while at the
same time providing fair, reasonable and competitive compensation
that will allow us to retain and attract superior executive talent.
We strongly believe that executive compensation should align
executives’ interests with those of shareholders by rewarding
achievement of specific annual, long-term and strategic goals by
the Company, with an ultimate objective of providing long-term
stockholder value. The specific goals that our current executive
compensation program rewards are focused primarily on revenue
growth and profitability. To that end, we believe executive
compensation packages provided by the Company to its executive
officers should include a mix of both cash and equity based
compensation that reward performance as measured against
established goals. As a result, the principal elements of our
executive compensation are base salary, non-equity incentive plan
compensation, long-term equity incentives generally in the form of
stock options and/or restricted stock and post-termination
severance and acceleration of stock option vesting upon termination
and/or a change in control.
Our
goal is to maintain an executive compensation program that will
fairly compensate our executives, attract and retain qualified
executives who are able to contribute to our long-term success,
induce performance consistent with clearly defined corporate goals
and align our executives’ long-term interests with those of
our shareholders. The decision on the total compensation for our
executive officers is based primarily on an assessment of each
individual’s performance and the potential to enhance
long-term stockholder value. Often, judgment is utilized in lieu of
total reliance upon rigid guidelines or formulas in determining the
amount and mix of compensation for each executive officer. Factors
affecting such judgment include performance compared to strategic
goals established for the individual and the Company at the
beginning of the year, the nature and scope of the
executive’s responsibilities and effectiveness in leading
initiatives to achieve corporate goals.
Role of Chief Executive Officer in Compensation
Decisions
Our
Board of Directors determines the base salary (and any bonus and
equity-based compensation) for each executive officer annually.
John Broderick, our Chief Executive Officer, confers with members
of the Board, and makes recommendations, regarding the compensation
of all executive officers other than himself. He does not
participate in the Board’s deliberations regarding his own
compensation. In determining the compensation of our executive
officers, the Board does not engage in any benchmarking of total
compensation or any material element of compensation.
Components of Executive Compensation
The
compensation program for our Named Executive Officers consists
of:
●
Non-equity
incentive plan compensation;
●
Long-term equity
incentive compensation; and
Base Salary
The
Company provides our executive officers and other employees with
base salary to compensate them for services rendered during the
fiscal year. The Board considered the scope and accountability
associated with each executive officer’s position and such
factors as the performance and experience of each executive
officer, individual leadership and level of responsibility when
approving the base salary levels for fiscal year 2019.
Non-Equity Incentive Plan Compensation
Non-equity
incentive plan compensation for our executive officers is designed
to reward performance against key corporate goals and for certain
of our executives for performance against individual business
development goals. Our executive officers’ incentive targets
are designed to motivate management to exceed specific goals
related to profitability objectives. We believe that these metrics
correlate to stockholder value and individual performance. Our
Chief Executive Officer did achieve a non-equity bonus of $25,000
in fiscal 2019 but did not achieve a non-equity bonus in fiscal
2018. Our Chief Revenue Officer did not achieve a non-equity bonus
in fiscal 2019 or 2018.
Our
Chief Executive Officer, Mr. Broderick, is eligible for non-equity
incentive plan compensation with a target bonus of $75,000 for
achieving targeted pretax income for fiscal 2020.
Our
Chief Revenue Officer, Mr. Sherin, is eligible to earn a commission
equal to 15% of incremental operating profit attributed to new
clients as defined in his employment agreement.
Long-Term Equity Incentive Awards
The
Company presently has one equity-based compensation plan under
which grants were made, entitled Cicero Inc. 2007 Employee Stock
Option Plan. The Plan provides for the grant of incentive and
non-qualified stock options to employees, and the grant of
non-qualified options to consultants and to directors and advisory
board members. In addition, various other types of stock-based
awards, such a stock appreciation rights, may be granted under the
Plan. The Plan is administered by the Board of Directors, which
determines the individuals eligible to receive options or other
awards under the Plan, the terms and conditions of those awards,
the applicable vesting schedule, the option price and term for any
granted options, and all other terms and conditions governing the
option grants and other awards made under the Plan. Under the 2007
Plan, 4,500,000 shares of our common stock were reserved for
issuance pursuant to options or restricted stock awards. The plan
expired in 2017 and as such there are no shares available for
future option grants and awards.
To
date, awards have been mainly in the form of non-qualified stock
options granted under the Plan. The Board of Directors granted
these stock-based incentive awards from time to time for the
purpose of attracting and retaining key executives, motivating them
to attain the Company's long-range financial objectives, and
closely aligning their financial interests with long-term
stockholder interests and share value.
We
account for equity compensation paid to all of our employees under
the rules of Financial Accounting Standards Board guidance now
codified as ASC 718 “Compensation – Stock
Compensation,” which requires us to estimate and record
compensation expense over the service period of the award. All
equity awards to our employees, including executive officers, and
to our directors have been granted and reflected in our
consolidated financial statements, based upon the applicable
accounting guidance, at fair market value on the date of grant.
Generally, the granting of a non-qualified stock option to our
executive officers is not a taxable event to those employees,
provided, however, that the exercise of such stock would result in
taxable income to the optionee equal to the difference between the
fair market value of the stock on the exercise date and the
exercise price paid for such stock. Similarly, a restricted stock
award subject to a vesting requirement is also not taxable to our
executive officers unless such individual makes an election under
section 83(b) of the Internal Revenue Code of 1986, as amended. In
the absence of a section 83(b) election, the value of the
restricted stock award becomes taxable to the recipient as the
restriction lapses.
Other Benefits
Our
executive officers participate in benefit programs that are
substantially the same as all other eligible employees of the
Company.
The
following summary compensation table sets forth the compensation
earned by all persons serving as the Company’s executive
officers during fiscal years 2019 and 2018.
Summary Compensation Table
Name and
Principal Position
|
|
|
|
Non-
Equity
Incentive
Plan
Compensation
|
All
Other
Compensation
(3)
|
|
|
John P.
Broderick
|
2019
|
$175,000(1)
|
--
|
$25,000(2)
|
$2,438
|
$202,438
|
|
Chief Executive
Officer, Chief Financial Officer, Corporate Secretary
|
2018
|
$175,000(1)
|
--
|
--
|
$2,404
|
$177,404
|
|
|
|
|
|
|
|
|
Antony
Castagno
|
2019
|
--
|
--
|
--
|
--
|
--
|
|
Chief Technology
Officer (4)
|
2018
|
$104,166
|
--
|
--
|
$802
|
$104,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd
Sherin
|
2019
|
$220,000
|
--
|
--
|
$28,241
|
$248,241
|
|
Chief Revenue
Officer
|
2018
|
$150,000
|
--
|
--
|
$26,317
|
$176,317
|
(1)
Mr. Broderick is
currently deferring $25,000 of his annual salary which commenced in
July 2013.
(2)
Non-equity
incentive plan compensation for Mr. Broderick includes a bonus for
certain revenue transactions earned during fiscal year ended
December 31, 2019. The revenue transaction was the acceptance of
the first contract greater than $300,000 for each fiscal
year.
(3)
Other compensation
includes the Company’s portion of major medical insurance
premiums and long-term disability premiums for named executives
during fiscal years ended December 31, 2019 and 2018,
respectively.
(4)
Mr.
Castagno’s employment with the Company was terminated on
January 15, 2018.
Grants of Plan Based Awards
The
Company did not award any stock options to the named executives
during fiscal 2019 and 2018. The Company did not award any stock
appreciation rights (SARs) during fiscal 2019 and
2018.
The
following table presents the number and values of exercisable
options as of December 31, 2019 by the named
executive.
Outstanding
Equity Awards at December 31, 2019
|
|
|
|
|
|
Number of
Securities Underlying Unexercised Options # Exercisable
(Vested)
|
Number of
Securities Underlying Unexercised Unearned Options# Unexercisable
(Unvested)
|
Option Exercise
price ($)
|
Option
Expiration date
|
Number of Shares
of Stock That Have Not Vested
|
Market Value of
Shares of Stock That Have Not Vested
|
|
John P.
Broderick
|
75,000(1)
|
--
|
$0.09
|
08/20/2020
|
|
|
|
|
|
|
|
|
549,630(2)
|
$4,837
|
|
|
|
|
|
|
1,500,000(3)
|
$13,200
|
(1)
These options were
granted on August 20, 2010. This stock option vested in three equal
installments with the first installment vesting on August 20,
2010.
(2)
These are
restricted stock granted on August 17, 2007. The shares will vest
to him upon his resignation or termination or a change of
control.
(3)
These are
restricted stock granted on November 9, 2012. The shares will vest
to him in the event of the termination, with or without cause, of
his employment by the Company or his resignation from the Company
with or without cause or in the event of a change of
control.
Options Exercised and Stock Vested
The
named executives did not exercise any options during the year ended
December 31, 2019. Mr. Broderick has 75,000 outstanding options at
December 31, 2019. Mr. Sherin has never been granted any stock
options.
Employment Agreements, Termination of Employment and
Change-In-Control Arrangements
Under
the employment agreement between the Company and Mr. Broderick
effective January 1, 2017, we agreed to pay Mr. Broderick an annual
base salary of $175,000 and performance bonuses in cash of up to
$250,000 per annum based upon exceeding certain revenue goals and
operating metrics, as determined by the Board, in its discretion.
Upon termination of Mr. Broderick’s employment by the Company
without cause, we agreed to pay Mr. Broderick a lump sum payment of
one year of Mr. Broderick’s then current base salary within
30 days of termination and any unpaid deferred salaries and
bonuses. In the event there occurs a substantial change in Mr.
Broderick’s job duties, there is a decrease in or failure to
provide the compensation or vested benefits under the employment
agreement or there is a change in control of the Company, we agreed
to pay Mr. Broderick a lump sum payment of one year of Mr.
Broderick’s then current base salary within thirty (30) days
of termination. Additionally, Mr. Broderick will be entitled to
receive 1,500,000 shares of the Company’s common stock in the
event of the termination, with or without cause, of his employment
by the Company or his resignation from the Company with or without
cause or in the event of a change of control (as that term is
defined in the Employment Agreement) of the Company. Mr. Broderick
will have thirty (30) days from the date written notice is given
about either a change in his duties or the announcement and closing
of a transaction resulting in a change in control of the Company to
resign and execute his rights under this agreement. If Mr.
Broderick’s employment is terminated for any reason, Mr.
Broderick has agreed that, for two (2) year after such termination,
he will not directly or indirectly solicit or divert business from
us or assist any business in attempting to do so or solicit or hire
any person who was our employee during the term of his employment
agreement or assist any business in attempting to do
so.
Under
the employment agreement between the Company and Mr. Sherin
effective July 17, 2017, we agreed to pay Mr. Sherin an annual base
salary of $150,000 and a commission of 15% on incremental operating
revenue of new clients as designated in an exhibit in his
agreement. If the Company terminates Mr. Sherin’s employment
without cause, we agreed to pay Mr. Sherin an amount equivalent to
three (3) months of Mr. Sherin’s then current base salary in
equal semi-monthly installments over that three (3) month period
following termination. If Mr. Sherin’s employment is
terminated for any reason, Mr. Sherin has agreed that, for eighteen
(18) months after such termination, he will not directly or
indirectly solicit or divert business from us, assist any business
in attempting to solicit or divert business from us, solicit or
hire any person who was our employee during the employment
agreement term, or assist any business in attempting to solicit or
hire any person who was our employee during the employment
agreement term.
Estimated Payments and Benefits Upon Termination
The
amount of compensation and benefits payable to the named executive
officers has been estimated in the table below and assumes a
termination date of December 31, 2019. Since all options held by
the executives are out-of-the-money, we have not estimated any
value for option acceleration. Deferred compensation reflects
amounts voluntarily deferred from salaries during fiscal 2012
through 2019 that had not been paid in fiscal 2019.
|
|
|
|
|
Total
Compensation and Benefits
|
|
John
P. Broderick
|
|
|
|
|
|
Death
|
$--
|
$18,037
|
$347,322
|
$365,359
|
|
Disability
|
--
|
18,037
|
347,322
|
365,359
|
|
Involuntary
termination without cause
|
175,000
|
18,037
|
347,322
|
540,359
|
|
Change
in Control
|
175,000
|
18,037
|
347,322
|
540,359
|
|
Todd
Sherin
|
|
|
|
|
|
Death
|
$--
|
$--
|
$--
|
$--
|
|
Disability
|
--
|
--
|
--
|
--
|
|
Involuntary
termination without cause
|
37,500
|
--
|
--
|
37,500
|
|
Change
in Control
|
37,500
|
--
|
--
|
37,500
|
The
amounts shown in the table above do not include payments and
benefits to the extent they are provided on a non-discriminatory
basis to salaried employees generally upon termination, such as
unreimbursed business expenses payable.
Stock Option Plan
In
2007, the Board of Directors approved the 2007 Cicero Employee
Stock Option Plan which permits the issuance of incentive and
nonqualified stock options, stock appreciation rights, performance
shares, and restricted and unrestricted stock to employees,
officers, directors, consultants, and advisors. The aggregate
number of shares of common stock that may be issued under this Plan
shall not exceed 4,500,000 shares upon the exercise of awards and
provide that the term of each award be determined by the Board of
Directors. No grants were awarded to our named executive officers
during fiscal 2017. The plan expired in 2017 and as such there are
no shares available for future option grants and
awards.
Director Compensation
No cash
or non-cash compensation was paid during fiscal 2019 by us to our
non-employee directors who served during fiscal 2019.
Item 12. Security Ownership of Certain Beneficial
Owners and Management.
The
following table sets forth information as of March 26, 2020 with
respect to beneficial ownership of shares by (i) each person
known to the Company to be the beneficial owner of more than 5% of
the outstanding common stock, (ii) each of the Company’s
directors, (iii) the executive officers of the Company named
in the Summary Compensation Table (the “Named
Executives”) and (iv) all current directors and
executive officers of the Company as a group. Unless otherwise
indicated, the address for each person listed is c/o Cicero Inc.,
8000 Regency Parkway, Suite 542, Cary, North Carolina
27518.
The
chart is based on 208,019,141 common shares outstanding as of March
26, 2020. Beneficial ownership is determined in accordance with
Rule 13-3(d) promulgated by the SEC under the Securities Exchange
Act of 1934. Except as otherwise stated in the footnotes below, the
named persons have sole voting and investment power with regard to
the shares shown as beneficially owned by such
persons.
|
Name of
Beneficial Owner
|
|
|
|
|
|
|
John L. Steffens
(1)
|
344,948,943
|
64.5%
|
9,333
|
100%
|
77.9%
|
|
Privet Fund
Management LLC (2)
|
18,250,000
|
8.8%
|
--
|
|
4.6%
|
|
Mark and Carolyn P.
Landis (3)
|
5,479,853
|
2.6%
|
--
|
|
1.4%
|
|
Don Peppers
(5)
|
3,172,179
|
1.5%
|
--
|
|
*
|
|
John P. Broderick
(6)
|
2,127,608
|
1.0%
|
--
|
|
*
|
|
Benjamin
Rosenzweig
|
--
|
*
|
--
|
|
*
|
|
Todd
Sherin
|
--
|
*
|
--
|
|
*
|
|
Antony
Castagno/SOAdesk LLC(4)
|
17,660,536
|
8.5%
|
--
|
|
4.5%
|
|
All current
directors and executive officers as a group (6 persons)
(7)
|
355,728,583
|
68.3%
|
9,333
|
100%
|
80.2%
|
*
Represents less
than one percent of the outstanding shares.
1.
The address of John
L. Steffens is 65 East 55th Street, New York,
N.Y. 10022. Includes 120,932,501 shares of common stock,
186,672,035 common shares issuable upon conversion of Series A
Convertible Preferred Stock, 37,334,407 shares issuable upon the
exercise of warrants and 10,000 shares subject to stock
options.
2.
Ryan Levinson holds
voting and dispositive power with respect to these shares. The
address of Mr. Levinson is 79 West Paces Ferry Road, Atlanta, GA
30305. Includes 18,250,000 shares of common stock.
3.
The address of Mark
and Carolyn P. Landis is 54 Dillon Way, Washington Crossing, PA.
18977. Includes 5,472,853 shares of
common stock, and 7,000 shares subject to stock
options.
4.
The address of Mr.
Castagno is 1110 3rd Street South, St.
Petersburg, FL 33701. Mr. Castagno is a principal owner of SOAdesk
LLC. Includes 17,660,536 shares of common stock.
5.
Includes 3,165,179
shares of common stock and 7,000 shares subject to stock
options.
6.
Includes 3,248
shares of common stock. 75,000 shares subject to stock options
exercisable within sixty (60) days and 2,049,360 shares of
restricted stock that is awarded upon termination or change of
control.
7.
Includes shares
issuable upon exercise of options and warrants as described in
above Notes for each director and officer.
Item 13. Certain Relationships and Related
Transactions, and Director Independence
Loans from Related Parties
From
time to time during 2017 through 2019, the Company entered into
several short term notes payable with John Steffens, the
Company’s Chairman of the Board, for various working capital
needs. The notes bear an interest rate of 10% with a maturity date
of June 30, 2018. In June 2018, all outstanding notes were amended
to a new maturity date of December 31, 2018. In December 2018, all
outstanding notes were amended to a new maturity date of June 30,
2020 and as such were reclassed to long term debt. The Company is
obligated to repay the notes with the collection of any accounts
receivable. At December 31, 2018, the Company was indebted to Mr.
Steffens in the approximate amount of $3,511,500 of principal and
$299,000 of interest. In March 2019, the Company issued 4,250
shares of its Series A preferred stock and warrants to purchase up
to 17,007,787 shares of the Company’s common stock at an
excise price of $0.05 per share to convert the total obligation of
$3,891,500 of principal and $358,697 of interest. At December 31,
2019, the Company was indebted to Mr. Steffens in the approximate
amount of $1,575,000 of principal and $97,000 of
interest.
Director Independence
Our
Board of Directors currently consists of five members. They are
John L. Steffens, John P. Broderick, Benjamin Rosenzweig, Mark
Landis, and Don Peppers. Mr. Steffens is the Company’s
Chairman of the Board, Mr. Broderick is the Company’s Chief
Executive Officer and Chief Financial Officer. The Company’s
stock is quoted on the Over The Counter Bulletin Board, which does
not have director independence requirements. Under Item 407(a)
of Regulation S-K, the Company has chosen to measure the
independence of its directors under the definition of independence
used by the NYSE American (the former American Stock Exchange),
which can be found in the NYSE American Company Guide,
§803(A)(2). Under such definition, Messrs. Steffens,
Rosenzweig, Avery, Landis, and Peppers are independent
directors.
Item 14. Principal Accountant Fees and
Services
Independent Registered Public Accounting Firm
Cherry
Bekaert LLP audited our consolidated financial statements for the
years ended December 31, 2019 and 2018.
Audit Fees
Audit
fees include fees for the audit of the Company’s annual
consolidated financial statements, fees for the review of the
Company’s interim consolidated financial statements, and fees
for services that are normally provided by the independent
registered public accounting firm in connection with statutory and
regulatory filings or engagements. The aggregate fees billed by
Cherry Bekaert LLP for professional services rendered to our
Company for the audit of the Company's annual consolidated
financial statements for fiscal year 2019 and 2018 (and reviews of
quarterly consolidated financial statements on Form 10-Q) were
$89,000 and $87,900, respectively.
Audit-Related Fees
Audit-related fees
include fees for assurance and related services that are reasonably
related to the performance of the audit or review of the
Company’s consolidated financial statements. There were no
audit-related fees billed by Cherry Bekaert LLP for fiscal year
2019 and 2018.
Tax Fees
Tax
fees include fees for tax compliance, tax advice and tax planning.
There were no fees billed by Cherry Bekaert LLP for these services
in 2019 and 2018.
Other Fees
All
other fees include fees for all services except those described
above. There were no other fees billed by Cherry Bekaert LLP for
fiscal years 2019 and 2018.
Determination of Auditor Independence
The
Audit Committee considered the provision of non-audit services by
Cherry Bekaert LLP and determined that the provision of such
services was consistent with maintaining the independence of Cherry
Bekaert LLP.
Audit Committee’s Pre-Approval Policies
The
Audit Committee has adopted a policy that all audits,
audit-related, tax and any other non-audit service to be performed
by the Company’s independent registered public accounting
firm must be pre-approved by the Audit Committee. It is the
Company’s policy that all such services be pre-approved prior
to commencement of the engagement. The Audit Committee is also
required to pre-approve the estimated fees for such services, as
well as any subsequent changes to the terms of the
engagement.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$(1,609)
|
$(2,065)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
4
|
3
|
|
Stock compensation
expense
|
2
|
2
|
|
Write off of bad
debt
|
--
|
2
|
|
Gain on write down
of liabilities
|
--
|
(125)
|
|
Changes in assets
and liabilities:
|
|
|
|
Trade accounts
receivable
|
(52)
|
210
|
|
Prepaid expenses
and other assets
|
(69)
|
(89)
|
|
Accounts payable
and accrued expenses
|
(5)
|
(178)
|
|
Deferred
revenue
|
(243)
|
6
|
|
Net cash used in
operating activities
|
(1,972)
|
(2,234)
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases of
property and equipment
|
(4)
|
(2)
|
|
Net cash used in
investing activities
|
(4)
|
(2)
|
|
Cash flows from
financing activities:
|
|
|
|
Borrowings under
short and long-term debt
|
1,955
|
2,402
|
|
Repayments of short
and long-term debt
|
(59)
|
(125)
|
|
Net cash provided
by financing activities
|
1,896
|
2,277
|
|
Net
increase/(decrease) in cash
|
(80)
|
41
|
|
Cash at beginning
of year
|
97
|
56
|
|
Cash at end of
year
|
$17
|
$97
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
Cash paid during
the year for:
|
|
|
|
Taxes
|
$5
|
$5
|
|
Interest
|
$92
|
$90
|
Non-Cash Investing and Financing Activities
2019
During
May 2019, the Company converted $1 of account payable to a vendor
by issuing 105,600 shares of its common stock.
During
March 2019, the Company converted $3,892 of debt and $356 of
interest to a related party lender by issuing 4,250 shares of its
Series A preferred stock.
2018
None.
The
accompanying notes are an integral part of the consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. SUMMARY OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND
RECENT ACCOUNTING PRONOUNCEMENTS
Cicero
Inc., (‘’Cicero’’ or the
‘’Company’’), is a provider of business
integration software which enables organizations to integrate new
and existing information and processes at the desktop. Business
integration software addresses the emerging need for a
company’s information systems to deliver enterprise-wide
views of the company’s business information processes. Cicero
Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc.
and re-incorporated in Delaware in 1999.
Going Concern and Management Plans:
The
accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred an operating loss of
approximately $1,609,000 for the year ended December 31, 2019, and
has a history of operating losses. Management believes that its
product’s functionality resonates in the marketplace as both
“analytics” and “automation” are topics
often discussed and written about. Further, the Company believes
that its repositioned strategy of leading with a no cost, short,
“proof of concept” evaluation of the software’s
capabilities will shorten the sales cycle and allow for value based
selling to our customers and prospects. The Company anticipates
success in this regard based upon current discussions and active
“proof of concepts” with active partners, customers and
prospects. Should the Company be unable to secure customer
contracts that will drive sufficient cash flow to sustain
operations, the Company will be forced to seek additional capital
in the form of debt or equity financing; however, there can be no
assurance that such debt or equity financing will be available.
These factors raise substantial doubt about the Company’s
ability to continue as a going concern within one year after the
date that the financial statements are issued. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
Principles of Consolidation:
The
accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All of the Company’s
subsidiaries are wholly owned for the periods
presented.
All
significant inter-company accounts and transactions are eliminated
in consolidation.
Use of Estimates:
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual amounts
could differ from these estimates. Significant estimates include
the recoverability of long-lived assets, stock based compensation,
revenue recognition, deferred taxes and related valuation
allowances and valuation of equity instruments.
Financial Instruments:
The
carrying amount of the Company’s financial instruments,
representing accounts receivable, accounts payable and short-term
debt approximate their fair value due to their short-term
nature.
Cash:
The
Company places substantially all cash with various financial
institutions. The Federal Deposit Insurance Corporation (FDIC)
covers $250,000 for substantially all depository accounts. The
Company from time to time may have amounts on deposit in excess of
the insured limits. As of December 31, 2019, the Company did not
exceed these insured amounts.
Trade Accounts Receivable:
Trade
accounts receivable are stated in the amount management expects to
collect from outstanding balances. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to
the allowance of doubtful accounts based on its assessment of the
current status of individual accounts. Balances still outstanding
after management has used reasonable collection efforts are written
off through a charge to the allowance of doubtful accounts and a
credit to trade accounts receivable. Changes in the allowance for
doubtful accounts have not been material to the consolidated
financial statements.
Property and Equipment:
Property
and equipment purchased in the normal course of business is stated
at cost, and property and equipment acquired in business
combinations is stated at its fair market value at the acquisition
date. All property and equipment is depreciated using the
straight-line method over estimated useful lives.
Expenditures
for repairs and maintenance are charged to expense as
incurred.
The
cost and related accumulated depreciation of property and equipment
are removed from the accounts upon retirement or other disposition
and any resulting gain or loss is reflected in the Consolidated
Statements of Operations.
Long-Lived Assets:
The
Company reviews the recoverability of long-lived intangible assets
when circumstances indicate that the carrying amount of assets may
not be recoverable. This evaluation is based on various analyses
including undiscounted cash flow projections. In the event
undiscounted cash flow projections indicate impairment, the Company
would record an impairment based on the fair value of the assets at
the date of the impairment. The Company accounts for impairments
under the Financial Accounting Standards Board (“FASB”)
guidance now codified as Accounting Standards Codification
(“ASC”) 360 “Property, Plant and
Equipment.”
Accrued Other:
Accrued
other is comprised of right of use lease liability, accrued legal,
consulting and other.
Cost of Revenue:
The
primary component of the Company’s cost of revenue for
maintenance and services is compensation expense.
Advertising Expenses:
The
Company expenses advertising costs as incurred. Advertising
expenses were approximately $96,000 and $125,000 for the years
ended December 31, 2019 and 2018, respectively.
Research and Product Development:
Research
and product development costs are expensed as incurred unless such
costs meet the software capitalization criteria. Research and
development expenses were approximately $1,147,000 and $991,000 for
the years ended December 31, 2019 and 2018,
respectively.
Other Income/(Charges):
Other
income/(charges) in fiscal year 2018 consists primarily of a write
off of certain liabilities deemed no longer payable in the amount
of $125,000. These liabilities were deemed no longer payable as the
statute of limitations obligated by the Company for these
liabilities had lapsed. No such write off occurred in fiscal year
2019.
Income Taxes:
The
Company uses FASB guidance now codified as ASC 740 “Income
Taxes” to account for income taxes. This statement requires
an asset and liability approach that recognizes deferred tax assets
and liabilities for the expected future tax consequences of events
that have been recognized in the Company’s consolidated
financial statements or tax returns. In estimating future tax
consequences, all expected future events, other than enactments of
changes in the tax law or rates, are generally considered. A
valuation allowance is recorded when it is ‘’more
likely than not’’ that recorded deferred tax assets
will not be realized. (See Note 7.)
Loss Per Share:
Basic
loss per share is computed based upon the weighted average number
of common shares outstanding. Diluted loss per share is computed
based upon the weighted average number of common shares outstanding
and any potentially dilutive securities. During 2019 and 2018,
potentially dilutive securities included stock options, warrants to
purchase common stock, and preferred stock.
The
following table sets forth the potential shares that are not
included in the diluted net loss per share calculation because to
do so would be anti-dilutive for the periods
presented:
|
|
|
|
|
Stock
options
|
681,211
|
706,211
|
|
Warrants
|
37,334,407
|
20,333,620
|
|
Preferred
stock
|
186,672,036
|
101,668,101
|
|
|
224,687,654
|
122,707,932
|
Stock-Based Compensation:
The
Company accounts for stock-based compensation to employees under
ASC 718 “Compensation – Stock Compensation,”
which addresses the accounting for stock-based payment transactions
in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments. The Company did not grant any options in fiscal year
2019 and 2018. The Company granted 500,000 restricted stock units
to certain employees in fiscal 2018. The Company recognized
approximately $1,000 and $2,000 of stock-based compensation in
fiscal year 2019 and 2018, respectively.
Recent Accounting Pronouncements:
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (ASU) No. 2016-02, which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. Topic 842 was subsequently
amended by ASU No. 2018-01, Land Easement Practical Expedient for
Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.
The new standard establishes a right-of-use model (ROU) that
requires a lessee to recognize a ROU asset and lease liability on
the balance sheet for all leases with a term longer than 12 months.
Leases will be classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the income statement.
The new
standard was effective for us on January 1, 2019. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
An entity may choose to use either (1) its effective date or (2)
the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for
existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the
disclosures required by the new standard for the comparative
periods. We adopted the new standard on January 1, 2019 and use the
effective date as our date of initial application. Consequently,
financial information will not be updated and the disclosures
required under the new standard will not be provided for dates and
periods before January 1, 2019.
The new
standard provides a number of optional practical expedients in
transition. We elected the ‘package of practical
expedients’, which permits us not to reassess under the new
standard our prior conclusions about lease identification, lease
classification and initial direct costs. We did not elect the
use-of-hindsight or the practical expedient pertaining to land
easements; the latter not being applicable to us. We elected all of
the new standard’s available transition practical
expedients.
This
standard did not have a material effect on our financial
statements. We believe the most significant future effects relate
to (1) the recognition of new ROU assets and lease liabilities on
our balance sheet for our real estate operating lease and (2)
providing significant new disclosures about our leasing
activities.
The new
standard also provides practical expedients for an entity’s
ongoing accounting. We elected the short-term lease recognition
exemption for our real estate lease that is currently on a month to
month lease. This means, for those leases that qualify, we will not
recognize ROU assets or lease liabilities, and this includes not
recognizing ROU assets or lease liabilities for existing short-term
leases of those assets in transition. As of December 31, 2019, the
Company reevaluated the lease under the guidance of Topic 842 and
estimated an expected term of one year for analysis under Topic
842. Under the new standard, the Company’s lease liability is
based on the present value of such payments and the related
right-of-use asset will generally be based on the lease liability.
The Company recognized on ROU asset and liability of approximately
$63,000 as of December 31, 2019. (See Note 4)
NOTE 2. REVENUE
On
January 1, 2018, we adopted ASC 606, Revenue from Contracts with
Customers and all the related amendments (“the new revenue
standard”) and applied it to all contracts using the modified
retrospective method. We completed our review of contracts with our
customers and did not need to record a cumulative effect adjustment
to accumulated deficit upon adoption of the new revenue standard as
of January 1, 2018. Under ASC 606, revenue is recognized when a
company transfers the promised goods or services to a customer in
an amount that reflects consideration that is expected to be
received for those goods and services. Adoption of the standard did
not have a material impact on the Company’s financial
position, results of operations, cash flow, accounting policies,
business processes, internal controls or disclosures.
Contract Balances
Timing
differences among revenue recognition may result in contract assets
or liabilities. Contract liabilities (deferred revenue) totaled
$217,000 and $460,000 as of December 31, 2019, and December 31,
2018, respectively. Revenue recognized from the contract
liabilities for the 12 months ended December 31, 2019 was $380,000.
The contract liability balances reflect the unrecognized
transaction price.
Our net
trade accounts receivables were $63,000 and $11,000 as of December
31, 2019, and December 31, 2018, respectively. Trade accounts
receivable are stated in the amount management expects to collect
from outstanding balances. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to
the allowance of doubtful accounts based on its assessment of the
current status of individual accounts. Balances still outstanding
after management has used reasonable collection efforts are written
off through a charge to the allowance of doubtful accounts and a
credit to trade accounts receivable. Changes in the allowance for
doubtful accounts have not been material to the consolidated
financial statements.
Performance Obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer and is the unit of account
under the new revenue recognition standard. The transaction price
is allocated to each distinct performance obligation and recognized
as revenue when, or as, the performance obligation is satisfied.
Most of our contracts have multiple performance obligations, which
include software, maintenance and professional
services.
Revenue Recognition
Cicero
utilizes point in time method for revenue recognition for its
software license revenue. Our software licenses are distinct and
have standalone functionality as it is fully functional without any
services purchased. Cicero utilizes the output method over time for
revenue recognition as maintenance contracts are invoiced annually
prior to the start of the maintenance period and then recognized
monthly over the length of the maintenance contract. Cicero
utilizes the output method over time for revenue recognition for
its services revenue as service hours/days are logged and billed
subsequently. Cicero has no upfront fees that are billable to
customers. Cicero established a standalone selling price for its
lines of revenue based on price list and historical
sales.
Practical Expedients and Exemptions
There
are several practical expedients and exemptions allowed under ASC
606 that impact timing of revenue recognition and our disclosures.
Below is a list of practical expedients we applied in the adoption
and application of ASC 606:
Application
●
The Company is
making the election not to disclose variable consideration
allocated to performance obligations related to either: (1) sales-
or usage-based royalties on licenses of intellectual property or
(2) variable consideration allocated entirely to a wholly
unsatisfied performance obligation or to a wholly unsatisfied
promise to transfer a distinct good or service that forms part of a
single performance obligation when certain criteria are
met.
●
The Company is
making an election to treat sales tax on a net basis, which would
not include it in the transaction price to allocate across
performance obligations.
●
The Company elects
to treat similar contracts among the business units as part of a
portfolio of contracts, primarily software license and maintenance
contracts. These contracts have the same provision terms, and
management has the expectation the result will not be materially
different from the consideration of each individual
contract.
●
The Company does
not evaluate a contract for a significant financing component if
payment is expected within one year or less from the transfer of
the promised items to the customer.
●
The Company
generally expenses sales commissions when incurred when the
amortization period would have been one year or less. These costs
are recorded within selling, general and administrative
expenses.
NOTE
3. ACCOUNTS RECEIVABLE
Trade
accounts receivable was composed of the following at December 31
(in thousands):
|
|
|
|
|
Current trade
accounts receivable
|
$63
|
$11
|
NOTE 4. LEASES
On
January 1, 2019, the Company adopted Topic 842, which is intended
to improve financial reporting about leasing transactions. Under
the standard, organizations that lease assets, referred to as
“Lessees” shall recognize on the balance sheet the
assets and liabilities for the rights and obligations created by
those leases. In addition, the standard requires disclosures
including financial statements to assess the amount, timing and
uncertainty of cash flows arising from leases.
The
Company elected to use the practical expedients permitted under the
transition guidance within the new standard, which among other
things, allows the Company to carryforward the historical lease
classifications. The Company made an accounting policy election to
account for leases with an initial term of 12 months or less
similar to existing guidance for operating leases today. The
Company recognized those lease payments in the Consolidated
Statement of Operations on a straight-line basis over the lease
term. In June 2014, the Company entered into an amendment with its
landlord and renewed its lease through 2018. In October 2016, the
Company entered into an amendment reducing the square footage being
leased for the remaining term of the lease. The lease expired in
October 2018 and the Company is currently on a month to month lease
with the landlord as it negotiates a new long term lease and as
such the Company has accounted for it as a practical expedient in
fiscal and accounted for it as an operating lease. As of December
31, 2019, the Company reevaluated the lease under the guidance of
Topic 842 and estimated an expected term of one year for analysis
under Topic 842. Under the new standard, the Company’s lease
liability is based on the present value of such payments and the
related right-of-use asset will generally be based on the lease
liability.
The
impact of the adoption of Topic 842 on the accompanying
consolidated balance sheet as of December 31, 2019, is as follows
(in thousands):
|
|
|
Adjustments Due
to the Adoption of Topic 842
|
|
|
|
|
|
|
|
|
Property and
equipment, net
|
$6
|
$63
|
--
|
$69
|
|
Current
liabilities
|
$17
|
--
|
$63
|
$80
|
|
|
|
|
Lease
term and discount rate
|
|
|
Weighted-average
remaining lease term operating lease
|
1.0 year
|
|
Weighted-average
discount rate operating lease
|
10.0%
|
Components
of lease assets and liabilities
|
|
|
|
Assets
|
|
|
Property and
equipment, net operating lease-right of use asset
|
$63
|
|
|
|
|
Liabilities
|
|
|
Current liabilities
operating lease-current liability
|
$63
|
NOTE 5. PROPERTY AND EQUIPMENT
Property
and equipment was composed of the following at December 31 (in
thousands):
|
|
|
|
|
Computer
equipment
|
$142
|
$138
|
|
Furniture and
fixtures
|
19
|
19
|
|
Office
equipment
|
35
|
35
|
|
Right of Use -
Lease
|
63
|
--
|
|
|
259
|
192
|
|
Less: accumulated
depreciation
|
(190)
|
(186)
|
|
|
|
|
|
|
$9
|
$6
|
Depreciation
expense of property and equipment was $4,000 and $3,000 for the
years ended December 31, 2019 and 2018, respectively.
Rent
expense was $66,000 for each years ended December 31, 2019 and
2018, respectively. The Company is currently on a month to month
lease with the landlord as it negotiates a new long term
lease.
NOTE
6. DEBT
Debt
and notes payable to related parties consists of the following (in
thousands):
|
|
|
|
|
Note payable
– asset purchase agreement (a)
|
$301
|
$361
|
|
Note payable
– related parties (b)
|
1,575
|
3,512
|
|
Notes payable
(c)
|
515
|
514
|
|
Total
debt
|
2,391
|
4,387
|
|
Less current
portion
|
1,927
|
411
|
|
Total long term
debt
|
$464
|
$3,976
|
(a)
As part of a prior
acquisition, the Company was subject to certain earn-out obligation
payments of up to $2,410,000 over an 18-month period from January
15, 2010 through July 31, 2011, based upon the achievement of
certain revenue performance targets. The earn-out was payable fifty
percent in cash and fifty percent in common stock of the Company at
the rate of one share for every $0.15 earn-out payable. The Company
had recorded $842,606 in its accounts payable as of December 31,
2014 due to a portion of earn-out obligations being met. In June
2015, the Company entered into a promissory note with SOAdesk for
fifty percent of the earn-out payable ($421,303) to SOAdesk. The
maturity date of the note was December 31, 2015 with an annual
interest rate of 10%. Through a series of amendments, the maturity
date was extended to January 31, 2020 and two milestone payments of
$62,500, to be applied to outstanding interest and then principal,
payable on June 1, 2018 and December 1, 2018, respectively, were
added. At December 31, 2018, the Company was indebted to SOAdesk
for $360,580 in principal and approximately $17,000 in interest. At
December 31, 2019, the Company was indebted to SOAdesk for $301,282
in principal and approximately $11,000 in interest.
(b)
From time to time
during 2017 through 2019, the Company entered into several short
term notes payable with John Steffens, the Company’s Chairman
of the Board, for various working capital needs. The notes bear an
interest rate of 10% with a maturity date of December 31, 2018. In
December 2018, all outstanding notes were amended to a new maturity
date of June 30, 2020 and as such were reclassed to long term debt.
The Company is obligated to repay the notes with the collection of
any accounts receivable. At December 31, 2018, the Company was
indebted to Mr. Steffens in the approximate amount of $3,511,500 of
principal and $299,000 of interest. In March 2019, the Company
issued 4,250 shares of its Series A preferred stock and warrants to
purchase up to 17,007,787 shares of the Company’s common
stock at an excise price of $0.05 per share to convert the total
obligation of $3,891,500 of principal and $358,697 of interest. At
December 31, 2019, the Company was indebted to Mr. Steffens in the
approximate amount of $1,575,000 of principal and $97,000 of
interest.
(c)
The Company has
issued a series of short-term unsecured promissory notes with
private lenders, which provide for short term borrowings. The
notes, in the aggregate amount of $50,000 of principal and $88,000
of interest and $50,000 of principal and $99,000 of interest, as of
December 31, 2018 and December 31, 2019, respectively, bear
interest between 10% and 36% per annum.
In
March 2012 the Company entered into an unsecured promissory note
with a private lender for $336,000 at an interest rate of 12% and a
maturity date of March 31, 2013. Through a series of amendments,
the note was amended to extend the maturity date to January 31,
2021 and a new principal balance of $498,500. Simultaneously a
$30,000 principal payment was made to the lender. A new repayment
schedule of quarterly principal and interest payments was added
beginning in January 31, 2018 with a payment of $30,000. $25,000
quarterly principal and interest payments are required to be made
beginning on April 30, 2018 through January 31, 2019. $40,000
principal and interest payments are required to be made on
beginning on April 30, 2019 through October 31, 2020. Final payment
of remaining principal and interest is due on January 31, 2021. The
lender agreed to waive certain quarterly payments in fiscal 2018 as
business conditions so warrant without triggering any default and
that any deferred payments would be added to the next quarterly
payment. At December 31, 2018, the Company was indebted to this
private lender in the amount of $464,350 in principal and $51,000
in interest and has been reclassified as long term debt due to its
maturity date of January 31, 2021. At December 31, 2019, the
Company was indebted to this private lender in the amount of
$464,350 in principal and $55,000 in interest.
NOTE 7. INCOME TAXES
The
Company follows the provisions of ASC Topic 740, “Income
Taxes,” and recognizes the financial statement benefit of a
tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the consolidated financial statements is the
largest benefit that has a greater than 50 percent likelihood of
being realized upon settlement with the relevant tax authority. The
Company applies ASC Topic 740 to all tax positions for which the
statute of limitations remains open.
The
Company has identified its federal tax return and its state tax
return in North Carolina as “major” tax jurisdictions.
Based on the Company’s evaluation, it has been concluded that
there are no significant uncertain tax positions requiring
recognition in the Company’s consolidated financial
statements. The evaluation was performed for the tax years 2016
through 2019, and may be subject to audits for amounts related to
net operating loss carryforwards generated in periods prior to
December 31, 2015. The Company believes that its income tax
positions and deductions will be sustained on audit and does not
anticipate any adjustments that will result in a material change to
its financial position. The tax returns for the prior three years
are generally subject to review by federal and state taxing
authorities.
The
Company’s policy for recording interest and penalties
associated with audits is to record such items as a component of
income tax expense. There were no amounts accrued for penalties and
interest as of or during the period for the tax years 2019 and
2018. The Company does not expect its uncertain tax position to
change during the next twelve months. Management is currently
unaware of any issues under review that could result in significant
payment, accruals or material deviations from its
position.
A
reconciliation of expected income tax at the statutory federal rate
with the actual income tax provision is as follows for the years
ended December 31 (in thousands):
|
|
|
|
|
Expected income tax
benefit at statutory rate (34%)
|
$(338)
|
$(434)
|
|
State taxes, net of
federal tax benefit
|
(80)
|
(101)
|
|
Effect of change in
valuation allowance
|
(2,110)
|
(1,256)
|
|
Non-deductible
expenses
|
1
|
1
|
|
Expired net
operating loss carryforwards
|
2,527
|
1,386
|
|
Expired employee
stock options
|
--
|
404
|
|
Impact of tax rate
change
|
--
|
--
|
|
Total
|
$--
|
$--
|
Significant
components of the net deferred tax asset at December 31 were as
follows:
|
|
|
|
|
|
|
|
|
Accrued expenses,
non-tax deductible
|
$1
|
$5
|
|
Deferred
revenue
|
56
|
119
|
|
Contingent
payments
|
(538)
|
(538)
|
|
Stock compensation
expense
|
--
|
--
|
|
Loss
carryforwards
|
35,125
|
37,125
|
|
Depreciation and
amortization
|
846
|
889
|
|
|
35,490
|
37,600
|
|
|
|
|
|
Less: valuation
allowance
|
(35,490)
|
(37,600)
|
|
|
|
|
|
|
$--
|
$--
|
As of
December 31, 2019, we had federal and state net operating loss
carryforwards of approximately $135,587,000. The associated
deferred tax asset related to these federal and state net operating
loss carryforwards was $35,125,000. The net operating loss
carryforwards expire between 2020 and 2037. The value of these
carryforwards depends on our ability to generate taxable income. As
of December 31, 2019 and 2018, we had deferred tax assets of
$35,490,000 and $37,600,000 upon which we had a full valuation
allowance.
A
valuation allowance for deferred tax assets, including NOL
carryforwards, is recognized when it is more-likely- than-not that
all or some portion of the benefit from the deferred tax asset will
not be realized. To assess that likelihood, we use estimates and
judgment regarding our future taxable income, and we consider the
tax consequences in the jurisdiction where such taxable income is
generated, to determine whether a valuation allowance is required.
Such evidence can include our current financial position, our
results of operations, both actual and forecasted, the reversal of
deferred tax liabilities, and tax planning strategies, as well as
the current and forecasted business economics of our industry.
Management assesses all available positive and negative evidence to
estimate whether sufficient future taxable income will be generated
to permit the use of deferred tax assets. A significant piece of
objectively verifiable negative evidence is the cumulative loss
incurred over the three-year period ending December 31, 2017. Such
objective negative evidence limits our ability to consider various
forms of subjective positive evidence, such as our projections for
future income. Accordingly, management has not changed its
judgement with respect to the need for a valuation allowance
against substantially all of our net deferred tax asset position.
The amount of the deferred tax asset considered realizable,
however, could be adjusted if estimates of future taxable income
are increased or if objective negative evidence in the form of
cumulative losses is no longer present and additional weight is
given to subjective positive evidence such as future expected
growth.
The
Company provided a full valuation allowance on the total amount of
its deferred tax assets at December 31, 2019 and 2018 since
management does not believe that it is more likely than not that
these assets will be realized.
NOTE 8. STOCKHOLDERS’ EQUITY
Stock Grants:
None.
Restricted Stock Units:
The
Company issued 500,000 restricted stock units to certain employees
in fiscal 2018. 250,000 units were forfeited in 2019 due to the
termination of an employee. The Company is accounting for the stock
compensation for the restricted shares using ASC 718
Compensation-Stock Compensation. The restricted stock vests on the
two-year anniversary of the date of grant and the employee needs to
still be employed at the time of vesting to receive the grant. The
Company uses the Black Scholes calculation to determine the expense
and records the expense over the life of the vesting period of each
grant. The Company recorded approximately $1,000 and $2,000 in
stock compensation expense in fiscal 2019 and 2018, respectively,
in relation to these grants.
The
Company entered into an employment agreement with its Chief Revenue
Officer, Mr. Todd Sherin, that included the granting of 5,000,000
restricted shares that vest over a three-year period and included
meeting certain performance obligations. The Company is accounting
for the stock compensation for the restricted shares using ASC 718
Compensation-Stock Compensation, specifically ASC 718-10-30-28,
718-10-55-10, and 718-10-55-61. Pursuant to these guidelines the
Company is not obligated to record compensation expense until the
point in time at which it is probable that Mr. Sherin would meet
the performance obligation set forth in the agreement. At such
time, the Company would record compensation expense by multiplying
the amount of shares vesting at that point by the stock price on
the effective date of the agreement. As of December 31, 2019, the
Company determined that the probability of meeting these
obligations was minimal and as such has not recorded any stock
compensation expense for this restricted stock grant.
Stock Options:
In
2007, the Board of Directors approved the 2007 Cicero Employee
Stock Option Plan which permits the issuance of incentive and
nonqualified stock options, stock appreciation rights, performance
shares, and restricted and unrestricted stock to employees,
officers, directors, consultants, and advisors. The aggregate
number of shares of common stock which may be issued under this
Plan shall not exceed 4,500,000 shares upon the exercise of awards
and provide that the term of each award be determined by the Board
of Directors. The Company also has a stock incentive plan for
outside directors and the Company has set aside 1,200 shares of
common stock for issuance under this plan.
Under
the terms of the Plans, the exercise price of the stock options may
not be less than the fair market value of the stock on the date of
the award and the options are exercisable for a period not to
exceed ten years from date of grant. Stock appreciation rights
entitle the recipients to receive the excess of the fair market
value of the Company's stock on the exercise date, as determined by
the Board of Directors, over the fair market value on the date of
grant. Performance shares entitle recipients to acquire Company
stock upon the attainment of specific performance goals set by the
Board of Directors. Restricted stock entitles recipients to acquire
Company stock subject to the right of the Company to repurchase the
shares in the event conditions specified by the Board are not
satisfied prior to the end of the restriction period. The Board may
also grant unrestricted stock to participants at a cost not less
than 85% of fair market value on the date of sale. Options granted
vest at varying periods up to five years and expire in ten years.
The plan expired in fiscal 2017 and as such no further options are
available to grant.
Activity
for stock options issued under these plans for the years ending
December 31, 2019 and 2018 was as follows:
|
|
|
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
|
Balance at December
31, 2017
|
1,577,750
|
0.05-0.51
|
$0.08
|
|
|
Granted
|
--
|
--
|
--
|
|
|
Forfeited
|
(796,539)
|
0.05-0.09
|
$0.07
|
|
|
Expired
|
(75,000)
|
0.23
|
$0.23
|
|
|
Balance at December
31, 2018
|
706,211
|
0.05-0.11
|
$0.08
|
|
|
Granted
|
--
|
--
|
--
|
|
|
Forfeited
|
--
|
--
|
--
|
|
|
Expired
|
(25,000)
|
0.11
|
$0.11
|
|
|
Balance at December
31, 2019
|
681,211
|
0.05-0.11
|
$0.08
|
$0.00
|
There
was no activity for non-vested stock options under these plans for
the fiscal year ending December 31, 2019 and 2018.
There
were no options granted in 2019 and 2018.
At
December 31, 2019, there was no unrecognized compensation cost
related to stock options.
At
December 31, 2019 and 2018, options to purchase 681,211 and 706,211
shares of common stock were exercisable, respectively, pursuant to
the plans at prices ranging from $0.05 to $0.11 . The
following table summarizes information about stock options
outstanding at December 31, 2019:
|
|
|
Remaining
Contractual Life for Options Outstanding
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
$0.05-0.06
|
203,461
|
2.7
|
203,641
|
$0.06
|
|
0.07-0.09
|
452,750
|
0.6
|
452,750
|
0.09
|
|
0.10-0.11
|
25,000
|
1.4
|
25,000
|
0.10
|
|
|
|
|
|
|
|
|
681,211
|
1.3
|
681,211
|
$0.08
|
Preferred Stock:
On
March 26, 2019, the Company entered into agreement with John L.
Steffens, the Chairman of the Board of Directors, to convert
$3,891,500 of principal amount of debt and $358,697 of interest
into 4,250 shares of the Company’s Series A Preferred Stock.
Per the Certificate of Designation, the initial conversion of
preferred stock to common equaled 85,003,934 shares of common stock
of the Company at a price of $0.05 per share, subject to adjustment
for stock dividends, stock splits and similar events. Additionally,
Mr. Steffens was granted a warrant for 17,000,787 of the
Company’s common shares at a price of $0.05 per share. The
Company accounted for the transaction pursuant to Topic ASC 470-50,
Modification and Extinguishment of Debt. Due to the fact that the
transaction was with Mr. Steffens, the Company’s Chairman of
the Board, the Company determined that this was not an arm’s
length agreement and as such has recorded the entire transaction
through additional paid in capital.
Series A
The
Series A Preferred Stock ranks senior in preference and priority to
the Company’s common stock with respect to dividend and
liquidation rights and, except as provided in the Certificate of
Designation or otherwise required by law, will vote with the common
stock on an as converted basis on all matters presented for a vote
of the holders of common stock, including directors. The Series A
Preferred Stock is convertible at any time at the option of the
holder at an initial conversion ratio of 20,000 shares of Common
Stock for each share of Series A Preferred Stock. The initial
conversion ratio shall be adjusted in the event of any stock
splits, stock dividends and other recapitalizations. The holders of
the Series A Preferred Stock are entitled to a liquidation
preference of $1,000 per share of Series A Preferred Stock plus any
declared but unpaid dividends upon the liquidation of the Company.
The Series A Preferred Stock may be redeemed by the Company at any
time and must be redeemed by the Company, upon the written request
of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock, after the occurrence of one of
the following events: (x) the Company’s trailing 12 month
EBITDA exceeds $5,000,000, (y) the sale of all, or substantially
all of the assets of the Company, or (z) the sale of all or
substantially all the intellectual property of the Company, which
in the case of “y” or “z” result in net
proceeds to the Company in excess of $6,000,000, at a redemption
price equal to $1,000 plus all declared but unpaid dividends, which
amount will be paid in three annual installments. The approval of
at least two thirds of the holders of Series A Preferred Stock,
voting together as a separate class, is required for: (i) the
merger, sale of all, or substantially all of the assets or
intellectual property, recapitalization, or reorganization of the
Company, unless such action (x) results in net proceeds to the
stockholders of the Company in excess of $5,000,000, and (y) has
received the prior approval of the Board of Directors. (ii) the
authorization or issuance of any equity security having any right,
preference or priority superior to or on parity with the Series A
Preferred Stock. (iii) the redemption, repurchase or acquisition,
directly or indirectly, through subsidiaries or otherwise, of any
equity securities (other than the redemption of the Series A
Preferred Stock) or the payment of dividends or other distributions
on equity securities by the Company (other than on the Series A
Preferred Stock). (iv) any amendment or repeal of any provision of
the Company’s Certificate of Incorporation or Bylaws that
would adversely affect the rights, preferences, or privileges of
the Series A Preferred Stock. and (v) the liquidation, dissolution
or winding up of the business and affairs of the Company, the
effectuation of any Liquidation Event (as defined in Certificate of
Designation), or the consent to any of the foregoing, unless such
action (x) results in net proceeds to the stockholders of the
Company in excess of $5,000,000, and (y) has received the prior
approval of the Board of Directors.
Stock Warrants:
The
Company values warrants based on the Black-Scholes pricing model.
In accordance with ASC 815, these warrants are classified as
equity. The warrants were issued in conjunction with certain
promissory notes and the private investment in the Company’s
shares. At December 31, 2019, there were 37,334,407 exercisable
warrants outstanding at an exercise price of $0.05 and $0.07 per
share.
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December
31, 2017
|
228,004,448
|
$0.04-$0.20
|
$0.05
|
|
Issued
|
--
|
--
|
--
|
|
Exercised
|
--
|
--
|
--
|
|
Forfeited
|
(207,670,828)
|
$0.04-$0.20
|
$0.05
|
|
Balance at December
31, 2018
|
20,333,620
|
$0.07
|
$0.07
|
|
Issued
|
17,000,787
|
$0.05
|
$0.05
|
|
Exercised
|
--
|
--
|
--
|
|
Forfeited
|
--
|
--
|
--
|
|
Balance at December
31, 2019
|
37,334,407
|
$0.05-$0.07
|
$0.06
|
Accrued Dividends:
The
Company reversed approximately $447,000 of accrued dividends
associated with previously issued Series B preferred stock in
fiscal 2018. The dividends were only payable to current
shareholders of Series B if there was a liquidation of the Company
or if approved by the Board of Directors. As an automatic
conversion of all outstanding Series B preferred stock was approved
by the Board of Directors in September 2015, the Company is no
longer under any obligation to pay dividends to the former holders
of the Series B preferred stock.
NOTE 9. EMPLOYEE BENEFIT PLANS
The
Company sponsors one defined contribution plan for its employees -
the Cicero Inc. 401(K) Plan. Under the terms of the Plan, the
Company, at its discretion, provides a 50% matching contribution up
to 6% of an employee’s salary. Participants must be eligible
and employed at December 31 of each calendar year to be eligible
for employer matching contributions. The Company opted not to make
any matching contributions for 2019 and 2018.
NOTE 10. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT
RISK
In
2019, two customers accounted for 77% of operating revenues and one
customer accounted for 100% of accounts receivable at December 31,
2019. In 2018, one customer accounted for 48% of operating revenues
and one customer accounted for 100% of accounts receivable at
December 31, 2018.
In
2019, one vendor accounted for 73% of accounts payable at December
31, 2019. In 2018, one vendor accounted for 68% of accounts payable
at December 31, 2018.
NOTE 11. RELATED PARTY INFORMATION
From
time to time during 2017 through 2019, the Company entered into
several short term notes payable with John Steffens, the
Company’s Chairman of the Board, for various working capital
needs. The notes bear an interest rate of 10% with a maturity date
of December 31, 2018. In December 2018, all outstanding notes were
amended to a new maturity date of June 30, 2020 and as such were
reclassed to long term debt. The Company is obligated to repay the
notes with the collection of any accounts receivable. At December
31, 2018, the Company was indebted to Mr. Steffens in the
approximate amount of $3,511,500 of principal and $299,000 of
interest. In March 2019, the Company issued 4,250 shares of its
Series A preferred stock and warrants to purchase up to 17,007,787
shares of the Company’s common stock at an excise price of
$0.05 per share to convert the total obligation of $3,891,500 of
principal and $358,697 of interest. At December 31, 2019, the
Company was indebted to Mr. Steffens in the approximate amount of
$1,575,000 of principal and $97,000 of interest.
NOTE 12. COMMITMENTS AND EMPLOYMENT AGREEMENTS
Under
the employment agreement between the Company and Mr. Broderick
effective January 1, 2019, we agreed to pay Mr. Broderick an annual
base salary of $175,000 and performance bonuses in cash of up to
$275,000 per annum based upon exceeding certain revenue goals and
operating metrics, as determined by the Board of Directors, at its
discretion. Upon termination of Mr. Broderick’s employment by
the Company without cause, we agreed to pay Mr. Broderick a lump
sum payment of one year of Mr. Broderick’s then current base
salary within 30 days of termination and any unpaid deferred
salaries and bonuses. In the event a substantial change in Mr.
Broderick’s job duties occurs, there is a decrease in or
failure to provide the compensation or vested benefits under the
employment agreement or there is a change in control of the
Company, we agreed to pay Mr. Broderick a lump sum payment of one
year of Mr. Broderick’s then current base salary within
thirty (30) days of termination. Additionally, as part of his
employment agreement for fiscal 2012, Mr. Broderick will be
entitled to receive 1,500,000 shares of the Company’s common
stock in the event of the termination, with or without cause, of
his employment by the Company or his resignation from the Company
with or without cause or in the event of a change of control (as
that term is defined in the Employment Agreement) of the Company.
Mr. Broderick will have thirty (30) days from the date written
notice is given about either a change in his duties or the
announcement and closing of a transaction resulting in a change in
control of the Company to resign and execute his rights under this
agreement. If Mr. Broderick’s employment is terminated for
any reason, Mr. Broderick has agreed that, for two (2) years after
such termination, he will not directly or indirectly solicit or
divert business from us or assist any business in attempting to do
so or solicit or hire any person who was our employee during the
term of his employment agreement or assist any business in
attempting to do so.
Under
the employment agreement between the Company and Mr. Sherin
effective July 17, 2017, we agreed to pay Mr. Sherin an annual base
salary of $150,000 and a commission of 15% on incremental operating
revenue of new clients as designated in an exhibit in his
agreement. If the Company terminates Mr. Sherin’s employment
without cause, we agreed to pay Mr. Sherin an amount equivalent to
three (3) months of Mr. Sherin’s then current base salary in
equal semi-monthly installments over that three (3) month period
following termination. If Mr. Sherin’s employment is
terminated for any reason, Mr. Sherin has agreed that, for eighteen
(18) months after such termination, he will not directly or
indirectly solicit or divert business from us, assist any business
in attempting to solicit or divert business from us, solicit or
hire any person who was our employee during the employment
agreement term, or assist any business in attempting to solicit or
hire any person who was our employee during the employment
agreement term.
NOTE 13. CONTINGENCIES
The
Company, from time to time, is involved in legal matters arising in
the ordinary course of its business including matters involving
proprietary technology. While management believes that such matters
are currently not material, there can be no assurance that matters
arising in the ordinary course of business for which the Company is
or could become involved in litigation, will not have a material
adverse effect on its business, financial condition or results of
operations.
Under
the indemnification clause of the Company’s standard reseller
agreements and software license agreements, the Company agrees to
defend the reseller/licensee against third-party claims asserting
infringement by the Company’s products of certain
intellectual property rights, which may include patents,
copyrights, trademarks or trade secrets, and to pay any judgments
entered on such claims against the reseller/licensee. There were no
claims against the Company as of December 31, 2019 and
2018.
NOTE 14. SUBSEQUENT EVENTS
In the
first quarter of 2020, the Company entered into notes payable
totaling $355,000 with Mr. Steffens. The note bears interest at 10%
per annum. The notes are unsecured and mature on June 30, 2020. The
Company is obligated to repay the notes with the collection of any
accounts receivables.
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